Central banks in Thailand and Hong Kong have the most mature interbank/wholesale central bank digital currency (CBDC) project in the world, according to a new report by PwC.
The "PwC Global CBDC Index 2021" analyses central banks' level of maturity in deploying their own digital currency, including tracking their progress and stance on CBDC development.
The index ranks the world's most advanced CBDC projects in terms of retail CBDCs held directly by corporations and citizens, and interbank/wholesale CBDCs restricted to financial institutions for interbank payments and financial settlement processes, according to Vilaiporn Taweelappontong, consulting lead partner and financial services leader for PwC Thailand.
Thailand and Hong Kong topped the rankings as the world's most mature interbank/wholesale project. They both achieved a score of 80, reflecting the progress made so far by Project Inthanon-LionRock initiated by the Bank of Thailand and the Hong Kong Monetary Authority (HKMA).
"Project Inthanon-LionRock is by far the most advanced wholesale CBDC project both in terms of the design and overall development," said Ms Vilaiporn.
"In 2019 the two central bank authorities initiated the project to test the application of CBDC to cross-border payments, leading to the development of a software prototype both for cross-border settlements and a range of other uses."
MORE PARTNERS JOINING
Now in phase two, the project is evolving from bilateral cross-border uses to functions involving multiple jurisdictions and currencies that are further enhancing the financial infrastructure for cross-border payments.
In February this year, the Central Bank of the United Arab Emirates and the Digital Currency Institute of the People's Bank of China joined Project Inthanon-LionRock, which was subsequently renamed "Multiple Central Bank Digital Currency Bridge", or m-CBDC Bridge. It will study potential outcomes in a multi-jurisdictional context as it evaluates the feasibility of the project.
"CBDCs can offer less costly transactions and improve the overall efficiency of the country's entire payment system, especially when using blockchain technology to create a safer, more transparent and modernised monetary ecosystem," said Ms Vilaiporn.
More than 60 central banks have already entered the digital currency race, according to the PwC report.
Retail CBDC initiatives are particularly strong in emerging economies, where financial inclusion and digitisation are key drivers. Meanwhile, interbank/wholesale CBDC projects are gaining strength in developed economies where interbank borrowing and capital markets are more prominent, according to the report.
The retail CBDC ranking placed the Bahamas at the top (with a score of 92) for its Sand Dollar, the world's first digital currency issued by a central bank. This was followed by Cambodia's Project Bakong (83). Both projects are now live.
TRENDS TO WATCH
The report also identified three CBDC trends to watch out for this year:
1. CBDC projects are gaining traction: With more than 60 central banks exploring CBDCs since 2014, some projects are now entering the implementation phase. Institutional involvement will continue to strengthen the ecosystem at large, with public stakeholders such as the Bank for International Settlements (BIS), the World Bank, the International Monetary Fund (IMF) and the World Economic Forum (WEF) all playing an active role.
2. CBDCs are now live and transactional volumes should be interesting to monitor: While there are two live retail CBDCs in the world, no interbank/wholesale CBDC projects have reached this maturity level yet. Nearly 70% of declared wholesale projects are already running pilot tests, while only 23% of retail projects have reached the implementation stage.
3. Blockchain is the technology of choice: More than 88% of CBDC projects, at the pilot or production phase, use blockchain as the underlying technology. This brings several benefits to CBDC developments including:
Integrated platforms built by design to share value and transfer ownership in a secure way, which is key to supporting digital money;
Smart contract programmability, supporting CBDC as a new form of programmable monetary instrument that could trigger automatic payments based on pre-programmed conditions
Transparent audit trails;
Configurable confidentiality features;
Increasing interoperability with other digital assets.
"The next step of CBDC development in Thailand is to accelerate its very advanced pilot wholesale CBDC initiative to a live project," said Ms Vilaiporn. "Meanwhile, the central bank is seeking public opinions until the middle of June on developing and issuing a retail digital currency."
"We believe that exploring the potential of retail CBDC will help to open doors for more diverse and inclusive financial services for citizens. Introducing CBDC can also improve tax collection and better manage money-laundering risks," said Ms Vilaiporn.
"However, further understanding the implications for monetary policy and the evolving roles of a central bank and financial institutions will all be key factors driving the future success of the country's digital currency development."