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This impact analysis examines the progress towards a central bank digital currency (CBDC) in countries with three different approaches to controlling their economies, namely: China; India; and Thailand. It will examine whether there are any similarities in their approaches in the lead-up to their CBDC issuance and, if there are, how this is affected by the economic and political situations in the countries.
Background
The risk of being banned in a particular jurisdiction is one of many concerns for crypto-based companies. For example, in 2021, the People’s Republic of China (PRC) banned the use of private cryptocurrencies such as Bitcoin, citing stability and security concerns, and announced that it would issue its own state-backed stablecoin, the e-yuan. This came as a shock to global crypto prices given that up until then Chinese citizens had been the second most prolific crypto-traders and miners on the globe, according to the Cambridge Bitcoin Electricity Consumption Index. Although China might have been the first in Asia to issue a CBDC, it is certain that it will not be the last as several countries, including India and Thailand, have announced plans for their own CBDCs.
China
For years, the PRC has strived to keep the value of the yuan at an artificially low rate to remain economically competitive, accumulating more than $1trn in US-backed securities in the process. In recent years, it has also imposed strict capital controls in an effort to prevent outflows of its currency. Given these strict controls, crypto, with its unregulated nature, flourished in China as a way of bypassing these controls. Pre-crypto ban, the citizens of the middle kingdom (China’s traditional official name in Mandarin) were the largest miners of Bitcoin in the world before plummeting sharply following the 2021 ban.
The PBOC has always made its feelings on cryptocurrency quite clear, banning local crypto exchanges in 2017 over what it said were money laundering and speculation fears. This ban was extended to cover foreign exchanges in 2019.
In September 2021, the PBOC banned all local financial institutions from processing crypto-transactions before making all such transactions illegal, a decision which caused the price of Bitcoin to fall by nearly US$2,000.
In early 2022, to coincide with the Winter Olympics, the PBOC announced the launch of China’s own CBDC, the digital yuan. Uptake of the digital currency has been high with an official at the PBOC stating that nearly 140m individual users had opened accounts in a matter of months. However, this is hardly surprising given that the PBOC effectively has a monopoly over digital currency.
Looking at the chronology of events outlined above, a clear four-step pattern for the introduction of CBDCs emerges:
- Criticism of private cryptocurrencies
- The imposition of barriers to trading and/or using crypto.
- An outright ban which creates a monopolistic market where a CBDC will flourish.
- The issuance of a CBDC.
The PBOC’s actions here, although novel, as crypto is a relatively new field in finance, is still consistent with its general approach of keeping tight control over China’s domestic market. Indeed, looking at the wider Asian region, it becomes clear that the PBOC is not alone in using this and similar four-step processes.
India
The Indian government, under Prime Minister Narendra Modi, for the past several years has taken measures to tackle so-called “black money” in the country. Perhaps one of the most well-known policies under this campaign was the demonetisation campaign in 2016 when the Reserve Bank of India (RBI) withdrew all RS500 and RS1,000 notes, causing significant disruption across the country as citizens rushed to change their notes. The campaign, originally intended to route out black money, also had the effect of pushing Indian consumers towards alternative payment methods. As a result, Indians became the second-highest crypto users in the world in 2021, with an annual user growth rate of 641 percent, making it second only to Vietnam in crypto adoption, according to Chainanalysis’ “The 2021 Geography of Cryptocurrency Report”.
Despite the popularity of crypto in India, the RBI has, from the start, not been keen on it. In 2013 (well before demonetisation or the Modi government), it issued a circular warning both financial institutions and consumers about the dangers and risks of using cryptocurrency.
Prohibitions were ramped up in 2018 when the RBI banned local financial institutions from facilitating crypto transactions, effectively making crypto illegal. This ban was subsequently struck down by the Supreme Court of India in 2020. The RBI and the Indian government, however, have proposed to regulate crypto as part of its annual finance bill in 2022. Although this appears promising, closer examination reveals that this is in fact a tax on crypto transactions above a certain limit, a tax on profits and an amendment to tax laws (see point 28 of the bill) that prevents the setting off of the aforementioned profits with trading losses. Given the volatility of the crypto market, this could effectively decimate India’s cryptocurrency market, as transaction taxes would severely hamper the rate at which trades could be made.
India's finance minister confirmed in April 2022 that it is looking to launch a CBDC in 2023 for both wholesale and retail functions. Here too, we see India’s nearly identical journey to China, although perhaps not as quick. Although India does not propose to ban crypto outright, the tax rates it is proposing on such transactions effectively amount to the same restrictions. It remains to be seen whether India’s e-rupee will be as popular as the Chinese e-yuan; however, India has nevertheless proposed a CBDC in largely the same manner.
Thailand
Thailand and its regulators have had a somewhat polarising attitude towards crypto. The South East Asian Kingdom has seen the popularity of cryptocurrencies such as Bitcoin and Ethereum increase, with 43 percent of the 74 percent of Thais aware of cryptocurrencies owning them, according to 2022 data from YouGov.
The Bank of Thailand (BOT) and the Thai Securities and Exchange Commission (SEC), however, have adopted a more cautious stance, frequently warning against the risk and dangers that unchecked and unregulated crypto transactions pose both to Thai citizens and to the financial stability of the country as a whole. The BOT has stated that it sees discouraging crypto as a payment method as part of its strategy for the timely and effective management of emerging risks.
These warnings were followed by a ban on crypto as a payment method in April 2022. This was a significant step as crypto was fast-gaining popularity in Thailand as a means to pay for everything including real estate. The SEC stated that this ban was to protect Thailand's financial stability given the unregulated nature of cryptocurrencies.
Around the same time of this ban, Thailand’s SEC then announced a number of new conditions and requirements (see 24/03/2565) for digital asset businesses, including a requirement to note the personal details of the sender and receiver in any crypto transaction involving privacy coins, as well as a proposed ban on the advertising of specific or new cryptocurrencies by crypto-exchange providers.
Thailand has long been a proponent of CBDC and announced in December 2021 that it would be trialling a retail CBDC later this year. Although this announcement came before the country banned crypto as a payment method, Thailand has still gone through the stages of criticism, restriction and regulation of cryptocurrencies before it actually issues its CBDC.
Thailand has gone through a similar process to both China and India in terms of CBDC-related development. Like China, Thailand had announced a ban on crypto for everyday goods and services and issued a CBDC shortly after, compared with India’s years-long CBDC rollout.
What does all this tell us?
Those Asian countries that issue a CBDC are usually those that have a tightly controlled economy. As the above analysis shows, these jurisdictions generally have kept a tight grip on their economies, controlling the movement of funds in and out of their borders. It is no surprise, then, that they see private cryptocurrencies as a threat to their goals of having complete control of their economies.
The nature of a country's government and/or political situation also plays a key role. As the analysis above shows, countries such as China and Thailand whose governments are comparatively more authoritarian will go through the stages of issuing a CBDC much more quickly, usually in the span of several months, as Thailand did when it went from banning crypto in mid-2021 to confirming that it would launch a CBDC in 2022. In comparison, a more politically and economically liberal country, such as India, is moving forward with its crypto ban and subsequent CBDC launch after two years of legal battles stemming from its original crypto ban being struck down in 2020.
From a commercial perspective, the announcement of a CBDC and the resulting regulation of private cryptocurrencies can come as a blow to local crypto providers and exchanges, but this does not necessarily have to be the case if crypto firms take advance notice of regulators’ actions.
This comparison of three distinct jurisdictions shows that Asian regulators almost always follow a similar pattern in the lead up to issuing a CBDC. The political situation of a country also provides us with key insights into how private cryptocurrencies will be affected by the issuance of CBDCs. As we have seen above, China, which has a tight hold on the economic activities of its citizens, banned the trading of crypto outright, whereas countries with a more liberal attitude to economic activity, such as India and Thailand, have instead decided to merely regulate private cryptocurrencies to varying degrees. However, the certainty of not being banned in more economically liberal countries is not the only deciding factor in choosing to enter a potential market as statistics have shown that private cryptocurrencies are much more popular in countries with strict economic controls, such as China, with the highest instance of bitcoin mining across the globe before the PBOC’s ban.
Determining what stage a particular country is at in its CBDC journey, coupled with examining its attitudes towards private cryptocurrencies, will enable private crypto providers to make a more informed choice when balancing the risk of being banned with the potential opportunity that a market that is keen on avoiding economic controls provides.
