The Rise of The Central Bank Digital Currency (CBDC) And What it Means For Singaporeans
Potentially, CBDCs can challenge the status quo of the traditional banking system as each dollar of CBDC issued by the central banks will have a unique immutable digital identity.
In addition, the central banks are directly liable for CBDCs, like how the U.S. dollar or the Renminbi is backed by America and China, respectively.
This is in contrast to today’s digital money, which is backed by the issuing bank. In theory, you can convert your cash into physical cash as and when you want.
But if everyone (individuals and financial institutions) were to withdraw their money at once over fears that the bank may default, it may cause a bank run.
The worst-case scenario here would be that the bank will default if it does not have enough reserves.
Potentially, CBDCs can disrupt the traditional fractional reserve banking system.
However, CBDCs require a tremendous amount of resources to develop, and the jury is still out on CBDCs as the concept is very new.
But, Governments are still willing to invest in CBDCs as, according to the International Monetary Fund (IMF), CBDCs have the following benefits.
Benefits of CBDCs
- More cost-efficient than physical cash as they have lower transaction costs
- Can promote financial inclusion, meaning those who are unbanked can get more accessible and safer access to money on their phone
- Can compete with private companies that need incentives to meet transparency standards and limit illicit activity
- Can help monetary policy flow more quickly and seamlessly.
Disadvantages of CBDCs
Unfortunately, CBDCs have their downsides as well as they are not:
- Decentralised, which means that they face the pitfalls of centralisation
- Allow Governments to have more control over their citizens
- There are privacy concerns as CBDCs can be tracked more extensively.
Will a CBDC be Adopted in Singapore?
Well, you have to look at the speech Ravi Menon, the managing director of the Monetary Authority of Singapore (MAS), gave at the recent Singapore Fintech Festival in November.
Mr Menon highlighted that (emphasis are mine):
On balance, the case for a retail CBDC in Singapore is not urgent.
For a subject that has attracted much attention, there are neither strong reasons for or against a retail CBDC in Singapore. Why do I say that?
Physical cash is likely to be with us for quite some time more and so the need for a digital version of cash is moot at this point.
The financial inclusion benefits of a digital Singapore dollar are not compelling. A high proportion of Singaporeans have bank accounts and electronic payments in Singapore are pervasive, highly efficient, and competitive.
Possible currency substitution by foreign digital currencies is a remote tail risk at this point.
The issuance of a retail CBDC is ultimately a socio-economic rather than monetary consideration. Moving to a fully cashless society with all money in the form of bank deposits will not make a significant difference to the conduct of monetary policy. The question is whether the public is comfortable with holding only bank deposits and whether there is public demand for a state-issued currency that is as safe as cash but in digital form.
So for now, there is no strong case for a retail CBDC.
At the same time, MAS recognises there could be potential benefits offered by innovative retail CBDC solutions in the future.
MAS is therefore embarking on Project Orchid – to build the technology infrastructure and technical competencies necessary to issue a digital Singapore dollar should Singapore decide to do so in future.
MAS will pursue Project Orchid in close partnership with the private sector, building on the rich findings from the Global CBDC Challenge that MAS launched earlier this year.
Got Questions About CDBCs?
Why not head on over to our recently revamped Seedly community page and continue your learning there!