.svg)
Malaysia’s central bank has published a new report outlining plans to study both wholesale and retail central bank digital currencies (CBDCs) for a range of use cases, while debate rages over digital assets.
On Wednesday (March 30), Bank Negara Malaysia (BNM) published its 2021 Annual Report, which contains a special section dedicated to the topic of digital assets and CBDCs.
In "Proceeding With Caution: Balancing Opportunities and Risks of Digital Assets", the central bank says it will conduct a multi-year study of the costs and benefits of introducing CBDCs.
The proof-of-concept study will take place in three phases, starting from 2021 and running until 2023 and beyond.
Phase 1 will take place from 2021-22, and will explore the potential of a cross-border wholesale CBDC via Project Dunbar.
Since November 2021, Project Dunbar has been studying the application of multiple CBDCs for international settlements via a common shared platform.
Project Dunbar is led by the Bank for International Settlements (BIS) Innovation Hub in partnership with the central banks of Australia, Malaysia, Singapore and South Africa.
Phase 2 will take place from 2022-23, and will explore the potential of a domestic wholesale CBDC.
In its annual report, BNM reiterates its interest in applying CBDC and distributed ledger technology (DLT) to enhance the country’s large value and real-time gross settlement (RTGS) system, known as RENTAS.
Phase 3 will begin in 2023 and will run indefinitely. In this final phase, the central bank will study the potential of a domestic retail CBDC, including its impact on fintech innovation, retail payments diversity and retail payments resilience.
Payments in focus
At present, BNM maintains that there is no need for CBDC or DLT to be integrated into the country’s payments infrastructure.
“The domestic payment systems are highly efficient and existing monetary and financial policy tools continue to be effective,” the report notes.
“While this reduces any pressing need to issue CBDC in the immediate term, we are actively scaling up our technical and policy capabilities to support our ability to issue CBDC for prospective use cases that could offer a higher level of benefits for Malaysia.”
The central bank considers wholesale payments as a more promising use case of CBDCs, and has given this application a “priority” status in its report. This mirrors similar observations from policymakers in neighbouring Singapore.
The report offers further praise for Project Dunbar, for example, which it says will aim to develop a prototype of a shared platform for cross-border transactions using multiple CBDCs, also known as a multi-CBDC network.
“Such a network enables participating financial institutions to transact directly with each other using CBDCs,” the report notes.
“By eliminating the need for intermediaries, this would significantly reduce the time and cost of cross-border payments.”
According to a 2021 study by Oliver Wyman and J.P. Morgan, a full-scale multi-CBDC network which facilitates 24/7, real-time cross-border payments could reduce the cost of cross-border transactions by approximately $100bn every year.
A house divided: Malaysia’s politicians at odds over crypto
The publication of Malaysia’s central bank report comes after a week of heated debate on the topic of digital assets among some of the country’s highest-ranking officials.
In an address to parliament on March 24, deputy finance minister Mohd Shahar Abdullah said Malaysia has no plans to make Bitcoin, or any other cryptocurrency, legal tender.
"Cryptocurrencies like Bitcoin are not suitable for use as a payment instrument due to various limitations,” he said, as quoted by Bloomberg.
Abdullah added that price volatility and cyber risks, among other reasons, make Bitcoin a poor candidate for legal tender.
In stating his opposition to Bitcoin as an official currency, Abdullah was responding to a suggestion made several days earlier by Zahidi Zainul, deputy minister of communications.
Likewise in an address to parliament, Zainul voiced his support for the idea of making Bitcoin legal tender.
“We hope the government can allow this,” he said. “We are trying to see how we can legalise this so that we can develop youth participation in crypto and assist them.”
Zainul added, however, that cryptocurrency regulations fall within the purview of Malaysia’s central bank and the country’s securities commission, neither of which have endorsed Zainul’s proposal.
According to Prasad Thandapani, regulatory monitoring associate at VIXIO, Malaysia observers should be aware of Zainul’s penchant for controversy, of which crypto has been an abundant source in recent years.
“Malaysia has seen a boom in crypto mining over the past couple of years, resulting in massive cases of electricity theft, which has been a headache for the government,” said Thandapani.
“And while there was a flurry of excitement over Zainul’s suggestion to make crypto legal tender, the reality is that this was merely an attempt at political point scoring by a junior minister notorious for making statements on matters far outside of his remit.”
Reasons to be cautious: Digital assets and ‘systemic risk’
In contrast to politicians such as Zainul, Malaysia’s central bank has struck a more cautious tone on the rise of digital assets.
In its annual report, for example, the bank draws attention to the “systemic risks” posed by Bitcoin, cryptocurrency and US dollar stablecoins.
“The widespread usage of digital assets for payments may lead to currency substitution, akin to ‘digital dollarisation’,” the report notes.
“In the event digital assets become widely used as a means of payment instead of Ringgit, this may undermine the efficacy of the bank’s monetary policy.
“Consequently, this may impact the bank’s ability to manage inflation and implement effective countercyclical policies to foster sustainable economic growth.”
Among the bank’s other concerns is that the growth of digital assets could threaten the stability of the Malaysian banking system and the credit services it offers.
“If the public find it more attractive to keep their savings in digital assets such as stablecoins, this could cause large shifts of deposits away from banks,” says the report.
“Such shifts may increase the banks’ dependence on costlier and less stable funding sources (e.g. wholesale deposits)”, which “may in turn drive up the cost of financing for borrowers and increase vulnerabilities to bank runs.”
The bank emphasises that Malaysia’s digital asset market is not yet large enough to produce the kinds of systemic shocks described above, but this may not be the case in future.
“Given this, we are pursuing a prudent and pragmatic approach to promote responsible innovation, while ensuring the attendant risks are adequately managed,” the bank concludes.
