As Thailand inches towards the government goal of a cashless society, the central bank is experimenting with means to accelerate the transition through the adoption of a centralised digital currency.
While regulations tighten around privately-created cryptocurrencies, the government is seeking to create its own digital currency to expedite transactions between banks and offer new payment methods to consumers.
The Bank of Thailand developed a prototype, the Retail Central Bank Digital Currency (CBDC), which it believes has the potential to become the foundation of Thailand's future financial infrastructure, as well as a publicly-issued digital currency to buy and sell goods.
The central bank also expects the currency to become an alternative means of payment that partially acts as a substitute for cash.
The bank is scheduled to test this currency in next year's second quarter, allowing all related parties to participate in the testing process.
WORK IN PROGRESS
Vachira Arromdee, assistant governor of the central bank, said the development of Thailand's financial system has progressed after the implementation of the digital financial platform, PromptPay, which is transforming the country into a less-cash society.
Digital banking transactions have increased significantly, she said.
The Retail CBDC could be the next step to develop the Thai financial market into a digital system, said Ms Vachira.
Merchant Partners Asset Management senior vice-president Prakit Siriwattanaket said central banks worldwide are witnessing the widespread use of digital currencies, and because they are in charge of the money supply, it is inevitable they want to step in and issue their own digital currencies for people to spend on a daily basis.
According to the Bank of Thailand, the local cryptocurrency market has grown at a tremendous pace. The trading volume of domestic cryptocurrency exchanges have increased 17 times from US$143 million in 2018 to $2.49 billion in 2020, due to both speculative investment and increased regulatory clarity.
According to the central bank's paper on CBDC and its implications for Thailand's monetary policy and financial stability, financial innovation has given rise to various forms of privately-issued digital currencies, such as cryptocurrencies.
These currencies enable consumers to make faster and cheaper peer-to-peer financial transactions without intermediaries, while facilitating investment in digital assets.
They have emerged as alternatives to publicly-issued fiat money, namely, banknotes and coins.
However, consumers face risks from using private digital currencies, ranging from high price volatility to cyber-attacks, said the central bank.
The issuance of a Retail CBDC could provide consumers with access to a digital form of central bank money that is trustworthy and safe, while offering economic and social benefits, stated the paper.
Firstly, a Retail CBDC would increase access to digital financial services and reduce cash management costs.
The currency can also prevent a monopoly in private financial services, which could lead to unfair practices or misuse of consumers' personal data, said the central bank.
In addition, a Retail CBDC could increase the efficiency of government stimulus policies by utilising the CBDC database to implement more targeted schemes, stated the paper.
TESTING ON TWO TRACKS
The central bank has conducted R&D on CBDC, beginning with a Wholesale CBDC for transactions among financial institutions, dubbed Project Inthanon in 2018.
The bank also studied and surveyed Retail CBDC implementation among all stakeholders.
Based on the results of the study and survey, it established guidelines for the development and testing of Retail CBDC as a pilot project on two tracks: foundation and innovation.
On the foundation track, the central bank plans to test and evaluate the use of Retail CBDC in conducting cash-like activities to a limited extent, such as acceptance and conversion of the unit, as well as using it to pay for goods and services.
This phase of testing is expected to begin in the second quarter of 2022.
The innovation track evaluates the ways in which CBDC can be developed for innovative use-cases by allowing the private sector and technology developers to participate.
The central bank is considering the format and criteria for participation in both tracks.
The study showed for the design and development of Retail CBDC to maximise its potential, the currency must not adversely affect monetary policy transmission, financial institutions or overall financial stability.
The Retail CBDC would be cash-like and non-interest bearing, with intermediaries such as financial institutions acting as distributors to the general public, said the central bank.
Conditions or limits for converting retail CBDC need to be established.
These guidelines are to ensure Retail CBDC does not compete with deposits or cause a run on financial institutions, preserving the role of intermediaries in collecting deposits and providing credit as well as managing liquidity in the overall financial system.
ADOPTION IN THAILAND
Poramin Insom, founder and chief executive of Thai-based licensed digital asset exchange SatangPro, said businesses that might be affected by Retail CBDC are licensed e-wallet operators.
According to the central bank study on the implications of such a currency on the country's monetary policy and financial stability, it expects CBDC would become an alternative means of payment and partial substitute for cash and e-money.
This option could manifest if Retail CBDC is widely accepted and is interoperable between different financial service platforms, while carrying lower transaction costs and risks, said the bank.
Several population groups, such as those unfamiliar with financial technology, might continue to use cash.
Some e-money users may also continue using e-money to access special services, promotions or privileges.
The central bank does not expect Retail CBDC to replace e-payments via the internet or mobile banking linked to deposit accounts, as these are already convenient and provide zero or tiny transaction costs, thanks recent developments in Thailand's payment infrastructure such as Prompt Pay and standardised QR codes.
According to the central bank paper entitled, "The Way Forward for Retail Central Bank Digital Currency in Thailand", there are three primary concerns associated with CBDC issuance: banking disintermediation (cutting out the middle man), bank runs and maintaining public trust.
PEOPLE POWER
Somkid Jiranuntarat, a digital adviser to the president of Krungthai Bank, said a Retail CBDC would benefit Thailand's financial system in the future. However, he recommends the central bank sets a clearer target for Retail CBDC development beyond cash replacement because mobile banking accomplishes that now.
The central bank should think outside the box about financial service development in the digital era, said Mr Somkid.
"The regulator is paying too much attention to financial stability, rather than what people want when developing Retail CBDC," he said.
If the central bank develops Retail CBDC based on what people want, it would facilitate digital financial services innovation and a shift away from traditional financial products, Mr Somkid said.
He proposed the central bank allow peer-to-peer lending services on the Retail CBDC platform, which would open greater opportunities for small entrepreneurs to access loans.
Small and medium-sized enterprises can rarely access bank loans now because of traditional loan approval concepts, said Mr Somkid.
Sam Tanskul, managing director of Krungsri Finnovate, the technology arm of Bank of Ayudhya, said Retail CBDC is expected to be used in specific programmes in the initial stages, focusing mainly on government schemes such as financial projects for farmers.