CBDC development outlook in 2022
Excerpt from the EmergentX Digital Asset 2022 Outlook report
Esme Pau, the Insights Lead of EmergentX has interviewed a group of industrial experts and consolidated their insights and opinions in the EmergentX Digital Asset 2020 Outlook report named Consilience (The linking together of principles from different disciplines especially when forming a comprehensive theory).
The full report is a deep dive into the digital asset opportunity and summarizes the 12 key trends that profoundly impacts our collective futures as stakeholders of the digital asset economy.
Below is excerpted from the full report in which I expressed my opinions as the Chairman of the Association of Cloud and Mobile Computing Professionals (ACMCP) over an interview carried out by Esme and her colleague.
Key Takeaway
▪ In 2022, we foresee strengthening global regulations and increasing institutional adoption of digital assets.
▪ China will likely continue to lead the development of CBDC technology.
▪ Notwithstanding the invention of CBDC, consumers will likely stick to the existing payment platforms given their value-added services.
2022 Outlook
Esme Pau (EP): Where do you see the global digital asset and blockchain industry headed in 2022? Please name the game-changing trends that you expect for 2022.
Emil Chan (EC): Entering 2022, we can foresee strengthening regulations worldwide and a growing trend of institutional adoption in the world of digital assets. As regulators catch up with the digital asset boom, particularly in the US and Europe, more traditional financial institutions will likely enter the market.
Hong Kong is a good example. While the pace of fintech development in Hong Kong is slower than that of Singapore, it is catching up quickly. As of now, there is one exchange license related to digital assets despite many restrictions. With the growing adoption from the traditional financial institutions and competitive pressures worldwide, the regulations related to digital assets in regions such as Hong Kong, Singapore and South Korea are likely to pick up in 2022.
Regulation and Institutionalization
EP: How will the major jurisdictions likely approach long term digital asset regulation?
EC: It is not easy for well-established and mature financial markets (like Hong Kong) to change. The higher the degree of maturity of a financial market, the lower the chance of financial product innovation.
In the long run, Hong Kong is unlikely to be the leader until an unexpected event occurs, such as a financial crisis, in my view. It could drive the city to re-position, and regulators will utilize the opportunity to impose more regulations to promote the digital asset market development. This could eventually attract more participants.
Digital assets would be a game-changer for both the CNY and the HKD. An introduction of a Hong Kong version of the central bank digital currency could be an example that might happen. CNY is of growing popularity in Hong Kong, given the city’s position as a gateway between East and West. There could be a day when we will be using a special wallet where all money circulation is traceable.
The pegging mechanism of HKD is one factor that needs to be considered. If e-HKD is pegged with USD and is a well-run digital currency, other countries could follow suit. With the help of central bank digital currency, we are likely to see Hong Kong transform itself from a traditional finance hub into a digital finance hub in one day.
Central Bank Digital Currency (CBDC)
EP: The CBDC narrative seems to be getting closer to reality. What do you think will be the major hurdles that need to be overcome in most jurisdictions for CBDC to be widely adopted?
EC: Many people believe that technology is the critical hurdle, which I beg to differ. China’s central bank launched digital CNY pilot schemes in several cities for more than a year.
There are two types of Central Bank Digital Currencies (CBDCs) — retail and wholesale CBDCs. One tier is for the Financial Institutions to settle domestic or crossborder payments, while the more complex second type allows the retail market to use. The banks and the third-party payment service providers like WeChat pay and Alipay could be the wallet providers. My view is the CBDC will be launched smoothly in a year or two.
The critical hurdle that is difficult to overcome is related to the tracking capability of the CBDC under blockchain technology. Some people would like to avoid tracking their spending behaviour and cash flow (potentially tax avoidance). They may be inclined to use other digital currency without the tracking mechanisms like cryptocurrency.
EP: Among the prominent CBDC use cases (for example, cross-border payments, financial inclusion etc.), please comment on the extent to which CBDC will be more advantageous than a paper currency?
EC: Regulators and governments are incentivized to implement CBDC for the following reasons:
• Paper currency could be a medium to transmit disease under the pandemic.
• Paper currency is not environmentally friendly, while electronic money would cause fewer environmental issues.
• Electronic money is highly traceable. With the help of blockchain technology, the time for analyzing the money supply circulation is impressively shorter or close to real-time. China would enjoy an upper hand as the leader in developing CBDC technology in the long run. Their CBDC system will be performing much better than the rest of the world.
EP: In what ways will a society with CBDC differ from our current state whereby we have several dominant payment systems? (For example, Alipay and WeChat Pay in China, and PayPal, Visa, Venmo globally)
EC: With CBDC, payment platforms such as Alipay and Wechat Pay will not need to deploy many resources to obtain the transaction data. Instead, they can retrieve them directly with CBDC.
Payment platforms have facilitated the transactions and built related payment infrastructure without charging fees from customers. These platforms monetize through data analytics, loyalty and marketing programs.
These payment platforms analyzed the spending behaviours and made better predictions than many traditional financial institutions. When CBDCs are in place, the competition will be fair, and data will be open. The Chinese government noticed that these payment platform companies monetize much easier than most traditional companies. However, people will still stick with these payment platforms as they provide more value-added services (such as logistics and online shopping) instead of solely payment services. The loyalty or stickiness towards the platform is likely to remain.
Data is the New Oil
EP: Data is the new oil. Regulatory and data breach risks are among the most critical factors for fintech and blockchain companies. To what extent do you agree with this statement? How do you suggest a fintech and blockchain company mitigate exposure to such threats?
EC: I agree with this statement. As mentioned earlier, payment is not just about moving money from one account to another or changing the ownership of an asset. With each transaction, a lot of data is created and can be analyzed subsequently for decision making.
Many fintech and blockchain companies focus on consuming and monetizing these data. I am impressed by the latest Personal Information Protection Law (PIPL) and the data security law. This set of rules provides a good reference for the institutions and the individuals to share the data in China.
For Hong Kong, we do not have such sophisticated rules. Individuals can only protect their interests by not sharing any data.
In the European Union, the General Data Protection Regulation (GDPR) will ensure that the companies can store the data with authorization from the end-users. Otherwise, they will be fined heavily.
I believe there is an urgency for the Hong Kong government to lay down a similar set of laws to promote fair competition for data sharing and usage. If not, I can foresee digital finance companies would prefer to conduct their business in other places like Singapore or the European Union.
Global perspective
EP: How do you foresee the evolution of the global competitive landscape for blockchain and digital assets in the medium to long term?
EC: There are three major trends — Decentralized finance (DeFi), CBDC and regulations.
For the first trend, DeFi, it does not matter where the companies are located. The most important thing is to try their very best to grow as long as the local regulations permit. DeFi companies will grow stronger with the introduction of the metaverse worldwide.
The second trend — CBDC — relate to the competition for the digital finance transformation between China and the rest of the world. China is the leader in CBDC development. CBDC development will help enhance different jurisdictions’ digital asset regulations.
The third trend — regulation — will drive competition for new products and services. Some countries could completely open up to welcome DeFi. The opposite extreme (such as China) will stop all local cryptocurrency businesses to focus on the nation’s version of digitalization.
Certain countries like India or Singapore may conduct a similar practice like China, but not to that extent. They will still grant digital licenses to some institutions, like the cases in Singapore, which helps promote the adoption of digital finance. In South America, El Salvador decided to adopt bitcoin as legal tender in 2021.
Future of Digital Assets and Blockchain
EP: Innovate or get left behind. How will you advise financial ecosystem stakeholders to embrace the opportunities arising from digital assets and blockchain?
EC: It depends on which countries you are referring to. Stakeholders in China follow the policy announced by the government. Stakeholders in Europe or America tend to be more open-minded or risk missing the opportunity.
Of course, no risk, no gain. Stakeholders need to measure the risk using a new methodology. A possibility is to conduct a sandbox approach, such as setting up a small project to penetrate a new industry and then moving on when proven.
I would advise institutions in Hong Kong to be more internationalized instead of getting stuck in the traditional markets. In certain areas, Hong Kong’s regulation is not up to the standard (the degree of data openness and innovation), and companies should expand to other jurisdictions.
