Cryptocurrency versus CBDC
28 Aug 2023
Cryptocurrency vs Central Bank Digital Currency (CBDC): The debate between private and public digital money
Over the past decade, cryptocurrency and blockchain technology have captured public imagination and spurred many fintechs and financial institutions to experiment how they could transform the financial services industry. But did you know that they are not exactly new concepts?
The first cryptocurrency called eCash, created by cryptographer David Chaum and his company DigiCash, existed as early as 1990. Yet, the famed Bitcoin only took off in 2009, on the back of the 2008 Financial Crisis. While many believe it was designed in response to the market crash, pseudonymous creator Satoshi Nakamoto had actually started work on the Bitcoin whitepaper in 2007, way before the crisis.
Today, the question of cryptocurrency’s purpose and role in our economy remains relevant. Will private cryptocurrencies one day replace fiat? If yes, that would mean a world in which you would use, perhaps, Bitcoin instead of Singapore Dollars to pay for a meal. Or would governments leverage cryptocurrency’s underlying blockchain technology to create digital fiat currencies within a centralised system? This is already being piloted in many countries (including Singapore) and is known as a Central Bank Digital Currency (CBDC). What advantages CBDCs have over existing digital currency systems, like Singapore’s PayNow network, are fair questions as well.
Defining digital money: cryptocurrency vs Central Bank Digital Currency (CBDCs)
In the Future of Finance Forum 2022, jointly organised by DBS and the Bretton Woods Committee and held in Singapore in November 2022, industry leaders from all over the world gathered for an open discussion on how digital technologies are revolutionising the world of finance.
The topic of digital money and how it will transform the future of finance was a key discussion point, especially in the regulator’s panel discussion.
On the panel alongside DBS CEO Piyush Gupta, who moderated the discussion, was William C Dudley, Chair, Board of Directors and Co-Chair, Digital Finance Working Group, Bretton Woods Committee; former President, Federal Reserve Bank of New York, Shri T Rabi Sankar, Deputy Governor, Reserve Bank of India, and Chea Serey, Assistant Governor and Director General of Central Banking of the National Bank of Cambodia.
Before getting deep into discussion, Piyush set the context with some key definitions:
Public digital assets: digitised versions of fiat money – e.g., the Singapore Dollar, but in a digital form, and with the benefits that come with blockchain technology. CBDCs are also in the same realm. “It is still fiat and backed by the imprimatur of the state, and so I put them all in the category of public assets," said Piyush.
Private assets: digitised versions of existing real-world assets (e.g., bonds, equity), non-fungible tokens (NFTs), stablecoins and finally, cryptocurrency. For the discussion on digital money, the panel focused on the last two.
The case for decentralised global cryptocurrency
Crypto evangelists envision a world with global currencies you can use to transact anywhere in the world; a completely decentralised system with no intermediaries, and purely peer-to-peer transactions. You might use the same cryptocurrency in your home country and when you’re overseas on vacation, and no financial institution would be involved when you make payment directly to a merchant for something you buy.
Piyush likened this to “the old Esperanto in the 1960s”, describing it as a global currency that enjoys the various benefits of blockchain technology – it can be used by anyone, anywhere, and any time, without restriction, as it is outside the realms of nation states, the Westphalian system and central bank.
On the topic, Rabi brought up the crypto anarchist manifesto of Timothy May, where he foresaw a similar future, but not without resistance from governing authorities.
According to May, “A spectre is haunting the modern world; the spectre of crypto anarchy.” This was a reference to the ideology of digital cash and how it should not be issued by fiat. He predicted that the rise of cryptographic technology will cause a “social and economic revolution” and that “the State will of course try to slow or halt the spread of this technology, citing national security concerns, use of the technology by drug dealers and tax evaders, and fears of societal disintegration”.
The case for Central Bank Digital Currency (CBDCs)
CBDCs take the technology of blockchain and tokenisation, and apply it to a digital fiat currency. The key difference between cryptocurrency and CBDCs is that CBDCs are regulated and issued by the central bank, while cryptocurrencies are decentralised and unregulated. CBDCs, essentially digital fiat money on a centralised blockchain, therefore hold the same value as physical fiat money.
There are also stablecoins, which are pegged to fiat currency, but unlike CBDCs, are backed by private entities and not the central bank. These are generally seen as the “true” middle ground between physical fiat money and digital cryptocurrency.
Existing CBDCs: China’s e-CNY, India’s E-Rupee, Cambodia’s Bakong, and Singapore’s Project Orchid
In several countries, CBDCs have already been implemented. In China, there is the e-CNY, in India, the e-rupee, and in Cambodia, there is the Bakong. In Singapore, the Monetary Authority of Singapore (MAS) launched Project Orchid, which explores the possibility of a retail CBDC. As part of the same initiative, DBS has also partnered with Open Government Products (OGP) to release Singapore’s first programmable money live pilot for government vouchers. This year (2023), DBS will be participating in the project by launching a pilot on programmable rewards.
Referencing India’s e-rupee, Rabi said, “So what we are thinking is that let's provide a digital currency, a digital rupee. Let the users, the consumers, decide for themselves whether they want this, whether they want a bank deposit in digital form or whether they want anything else. It is a consumer choice that they will make. But I'm convinced that there is no use case that a private digital currency can provide that fiat digital currency cannot.”
On the panel was also Serey from Cambodia, where the Bakong is used. When it comes to peer-to-peer transactions, one of the key issues the Bakong – utilising blockchain technology – addressed was the interoperability between different players in the market. “(The different players) don't have to be in the system; they don't have to comply with the liquidity issue. All they need to do is to be able to issue this form of digital money to their client and from their client. The payment service provider doesn't have to worry about the settlement part,” said Serey.
In Cambodia, the Bakong connects people in the rural and urban areas, allowing seamless and direct transactions. Some examples Serey cited include migrant worker transactions to healthcare institutions, schools, and even specific family members. Cambodia is also exploring cross-border uses, although currently it only leverages blockchain technology when the funds enter Cambodia.
"For cross-border partners, we're still conventional. But the moment it goes into Cambodia, it's all blockchain distributed. We are currently exploring with Laos and Vietnam to see how we can use this blockchain technology where each country will create their own currency. And every time a customer of a bank sends money, the bank itself, the individual bank, will do the conversion. We don't need a central foreign exchange bank,” said Serey.
In China, the official roll-out of e-CNY, or digital Yuan, in 2020, was the first of its kind by a major economy. With the CBDC’s usage growing steadily in the country, it could revolutionise the simplicity and speed of global businesses’ transactions with China.
Should we regulate cryptocurrency and digital exchanges?
During the forum, Piyush highlighted how differently Asian and Western regulators seem to be approaching the “debate” between private and public money. He explained that the Western approach seems to be to encourage the crypto industry to flourish, before thinking about what regulation is needed, if any at all.
In contrast, he said that Asian regulators “don’t see a role for private money”, but we should “use the technology to digitise public money” instead. That said, Piyush acknowledged the risks that come with a retail CBDC, “In a crisis that all the money is moved to the central bank, is the central bank responsible for credit creation?”
Dudley chimed in with his take on what the focus of regulators should be. “I want a regulatory regime that's focused on outcomes. We want to be able to protect people. We want people to actually have security in their accounts. We want people to have trust in the system.
“The point is to focus on outcomes, not on just taking over the existing regulations, but to do that, you have to have the firms that you're regulating want to understand the value of the regulation and that this is actually going to lead to a better outcome for them. That's the challenge because there's some people that don't want to be regulated. Let's be very clear about that," he said.
Piyush agreed, saying, “Of course, most crypto players are showing up saying, ‘Hey, regulate me’, but I'm not sure what they really want to be regulated."
For more context and deeper insights, watch the full panel discussion here:
Building the future of payments with DBS
DBS believes that blockchain and distributed ledger technology can transform the future of payment networks. As mentioned above, DBS is partnered with OGP to pilot the use of Purpose-bound Money (PBM) – which is digital money or tokenised cash that is bounded by logic and transferrable upon fulfilment of programmable conditions. DBS is also conducting a second pilot this year on programmable rewards solutions. Read more about Project Orchid and Purpose Bound Money here.
DBS has also partnered with JP Morgan and Temasek to launch a real-time cross-border and multi-currency platform, Partior. Partior uses a blockchain network, leveraging the technology’s key benefits of programmability, immutability and traceability. Learn more about Partior here. You may also read more about Project Ubin, which was an industry initiative led by the Government, and the launch pad for Partior.
DBS in 2022 also participated in the MAS-led Project Guardian to explore the settlement of foreign exchange and government securities transactions using permissioned decentralised finance protocols. This year (2023), alongside SBI and UBS, DBS will be working on the execution of a pilot repurchasing agreement with natively issued digital bonds to enable greater flexibility and efficiencies.
Said Andrew Ng, Group Head of Treasury & Markets at DBS, of this pilot, “DBS is committed to explore new frontiers in financial services innovation. As an active collaborator in industry projects, we aim to build and strengthen safe and efficient financial market infrastructure that can support new evolving asset classes including digital assets.”
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