Adoption, use cases, speculation

Digital assets, including but not limited to digital currencies, keep rising in value, product offering, and use cases, while displaying elevated levels of volatility and regulatory risks. Recent months have seen a wide variety of innovative applications coming to the market, adoption by numerous mainstream financial service providers, public sector initiatives, and a heightened degree of exuberance. Rapid changes come with speculation, skepticism, regulatory reaction, and excesses, and the area of digital assets is proving to be no exception. From criticism of the carbon footprint of Bitcoin to astonishment at the value with which NFTs are changing hands, digital assets are also under a great deal scrutiny.

The NFT surge

Non-fungible Tokens (NFTs) captured the public’s attention in February as a piece of video art sold for USD6.6mn, which was heightened further in March when a collage of digital art produced by the same artist (who goes by the name Beeple) sold for USD69mn. What was common between both transactions was that the purchaser did not receive anything physical; all that was received was a crypto asset known as NFT.

NFTs are unique, they are not “fungible” or interchangeable like currency. The NFT attests to the ownership of the asset, which therefore can be seen as a virtual certificate of authenticity. Presently, NFTs are being transacted in digital marketplaces with crypto currencies as the medium of payment and the Ethereum blockchain as the decentralised ledger of choice.

These features open up a number of possibilities. The use of NFT through a blockchain establishes ownership and provenance in an ironclad manner, with the help of smart contracts and meta data. The transparency regarding ownership and transaction solves problems that can sometimes be associated with various non-virtual markets, particularly art, jewelry, and property. NFTs can disintermediate dealers and other forms of middlemen, allowing buyers and sellers to capture a larger chunk of value of each transaction. NFTs are programmable and portable, which allow a piece of content, once uploaded to the blockchain, to be augmented or attached to other content by third parties. For example, an NFT representing a backstage pass to a concert can be made more valuable or collectible by combining it with other content from the musical act. 

NFTs are being used to transact a wide range of virtual collectibles, ranging from NBA virtual trading cards to internet memes and tweets. Once purchased, the token can be displayed on monitors or placed in a virtual gallery. Between music, video games, and art, there are hundreds of billions of dollars’ worth of annual transactions that be conceivably tokenized, giving more control and value to the content creator. Potentially, the royalty from an NFT can flow back to the creator every time they change hands. 

It can be vexing to think through the idea of attaching value to replicable pieces of digital art, but NFTs may well turn out to be an organizing principle much needed in the seemingly endless supply of digital content. They may also usher in new modes of marketing and advertising. 

DeFi on the move 

Decentralised Finance (DeFi) is a catch-all term. It captures a series of financial services that can be carried out on public blockchains (primarily Ethereum). Two parties (global, peer to peer) can engage in lending/borrowing, buying/selling insurance, trading assets, etc. DeFi promises to be a virtual, egalitarian, decentralised Wall Street that is open, private yet transaction-wise transparent, flexible, and fast.

Decentralised apps running on the blockchain can help users lend out their crypto assets, earn interest (or rewards) on the lending, or conversely, obtain loans along a very wide spectrum of duration. Running on a set of self-executing rules established by the user community, DeFi takes out the role or risk associated with a central standard-setting authority.

DeFi, like any new technology application, is undergoing teething pains, including high cost of trading, volatility, and regulatory uncertainty. These are early days for what promises to be a source of a variety of financial intermediations.  If DeFi can pass the test of speed, cost, and transparency, financial institutions would find it in their interest to join in, issuing tokens and acting as the bridge between centralised and decentralised finance. Regulators will have to evolve as well, needing to approve protocols and smart contract before they are widely used.

Crypto market update

The massive rally in BitCoin has dominated market headlines, so far in 2021. During the first quarter, BitCoin's price surged by 100%, and at one point, had risen above USD61,000 (13 Mar). Market capitalization crossed the trillion dollar mark (USD1.1tn) from USD537bn at start of the year. 



Price volatility has been elevated in 2021, even by Bitcoin's standards, with 1M and 3M volatilities recently at ~80%. Bitcoin continues to trade at a positive correlation (0.20-0.40) to the S&P500, both reflecting its mainstreaming and its characteristics as a risk asset.

Year to date, there has been a significant deepening and broadening of interest and participation, from all segments of ownership (retail, institutional, corporate). As a proxy for retail, based on Glassnode Studio data, the number of addresses with greater than or equal to 0.01 and less than 10 Bitcoins have jumped to 8,766,564 (19-Mar) from 8,339,542 (31-Dec), a 5.1% increase in less than 3 months. Institutional inflows have also spiked in 2021, as proxied by the ~USD3-4bn of estimated inflows into the Grayscale Bitcoin Trust and ~USD1-1.5bn surge in open interest of CME Bitcoin futures.



There have been more news of corporate treasurys investing or shifting their cash reserves into cryptocurrencies, particularly Bitcoin. In early February, it became known that Tesla Inc had updated its investment policy in January, to allow the purchase of digital assets. The electric-car maker also disclosed that it had invested USD1.5bn of its cash reserves into Bitcoin, and expects to begin accepting Bitcoin as a form of payment for Tesla products. Post Tesla's disclosure, Bitcoin rallied by 27% over a one-week period. In early March, Aker Solutions, a Norwegian engineering company, announced that it would be establishing a new unit dedicated to investing in Bitcoin and blockchain technology. China's Meitu Inc, a photo-editing app company, disclosed that it had purchased USD18mn worth of Bitcoin, as part of a USD100mn plan to invest in cryptocurrencies. Other known Bitcoin-investing companies, such as MicroStrategy and Square Inc, have also continued to increase holdings in 1Q2021.

Across the broader cryptocurrency space, payment providers and custodians have recently announced further plans. Mastercard announced that they will start supporting select cryptocurrencies directly on their network, essentially allowing customers and merchants to make crypto payments. BNY Mellon announced the formation of a new enterprise unit to develop a multi-asset custody and administration platform for traditional and digital assets.

Central Bank Digital Currencies update

The Bank for International Settlements has published results of its 2020 survey on central bank digital currency (BIS, 2021).  86% of central banks has responded that they are now engaging in CBDC work, up from 80% in 2019. Interestingly, increasing work is being done on retail CBDC relative to wholesale CBDC, with central banks choosing either to work on both wholesale and retail, or focusing instead on retail alone. Survey results also show widening progress into more advanced stages of CBDC engagement, with 60% of central banks conducting experiments and proofs-of-concept, up from a mere 42% in 2019. 

The BIS survey shows that Emerging Markets (EM) central banks report stronger motivations for issuing CBDCs compared to Advanced Economies (AE) central banks. Financial stability, monetary policy implementation and financial inclusion were all placed at a substantially higher level of importance for EM central banks than AE central banks, where such motivations have become less important. On the other hand, payment efficiency and payment safety were ranked about equally for both AE and EM central banks, and they are the likely to be the key factors being an increasing focus on retail CBDCs. The only area where wholesale CBDCs are stronger is in cross-border payments efficiency.

In terms of legal frameworks for the issuance of CBDC, most central banks either do not have the authority to issue CBDCs (26%) or are uncertain of their authority (48%). This reflects the fact that most central banks have not advanced beyond proof-of-concept to development and pilot arrangements. 

With regards to cryptocurrencies, most central banks have indicated that there is only trivial use, or usage by niche groups at both the domestic and cross-border level. This is in line with surveys from previous years. However, stablecoins, which maintain trust in the stability of their value, are being analyzed by most monetary authorities. The survey reports that two thirds of central banks are studying their impact on monetary and financial stability.

The Organisation of Economic Co-operation and Development has also reviewed the implications of CBDC for domestic and international payments (OECD, 2021). The interoperability of decentralized ledgers (with Distributed Ledger Technology or DLT) allows CBDC to be used for cross-border payments, with three feasible operational models. In a first model, central banks would issue CBDC against their local currency on specific accounts opened by private entities, such as correspondent banks. A second model explores potential agreements between national central banks to operate CBDC accounts accessible to any participating bank. A ledger would exist for each currency, and banks could directly access a foreign currency without relying on anything but the DLT. A third model sees the creation of a universal international currency, similar to the model of the stablecoin, against which all currencies would be quoted and traded on DLT-operated networks.

While a stablecoin may increase efficiency of cross-border payments, wide adoption would come with several risks. There could be less efficient market clearing in FX, monetary policy could be constrained, and the contestability of the payments market may be reduced. CBDCs could offer an opportunity to address local payment challenges, without these negatives.

Wholesale CBDC could further reduce intermediary costs and liquidity needs associated with the current real-time gross settlement (RTGS) system. The CBDC could facilitate the exchange between a central bank and its designated central counterparties (systemically important commercial banks having access to the central bank’s balance sheet through reserves deposit). This could enhance liquidity, reduce settlement risks, ensure complete availability of settlements on a continuous basis, and reduce intermediary costs.

A Universal CBDC could also play a growing role as demand for physical cash falls, with means of payment and storage of value becoming increasingly digital. If CBDC access is provided to the general public, there could be risks to financial stability in the deposit market, due to their risk-free nature. There are different options to lower this risk, such as promoting a financial safety net, or imposing CBDC portfolio ceilings and dynamic transfer fees. An interest-bearing CBDC may further deepen financial market disintermediation, and potentially lower the profitability of the banking sector.

New monetary policy options could emerge with CBDC. First, central banks could gain total control over the market interest rate, reducing the effect of a credit freeze and ultimately strengthening the monetary policy transmission channel. Second, an interest-bearing token CBDC that replaces cash could prevent economies from entering the liquidity trap, by alleviating the zero-lower bound for rates. Lastly, an account-based, general access CBDC could see central banks providing money directly to consumers, financed by central bank balance sheets.

G3 CBDC initiatives

US Federal Reserve

Fed Chair Powell mentioned during his February semi-annual congressional testimony that the Fed is looking carefully at the possibility of issuing a digital dollar. Powell said the Fed will consult with the public, and assess pros and cons of a digital dollar, such as supporting financial inclusion and risks of disrupting bank intermediation.

In a post-testimony note, the Fed also discussed a list of pre-conditions that support a CBDC. The pre-conditions can be categorized into five areas as listed below:



Beyond specific objectives such as payment efficiency and innovation, a CBDC should also align with the Fed’s longstanding objectives of the safety and efficiency of the nation’s payments system, on top of monetary and financial stability. Furthermore, inputs and engagement with both public and private stakeholders should be sought. Government bodies, end users, financial institutions, technology and infrastructure providers, and others could give valuable inputs to making decisions that will facilitate the attainment of policy objectives.

A strong legal framework is needed to ensure that the Fed has legal authority to issue CBDCs, and that the CBDC also enjoys legal tender status. Privacy and issues related to AML/CFT are also to be considered. For technology aspects of a CBDC, system integrity and operational robustness will be key. Lastly, both individuals and businesses must be willing to adopt CBDC for payments, and there is a ready market to ensure widespread acceptance.

European Central Bank

The ECB published a press release on its public consultation on the digital euro in January, with survey responses collated from citizens, firms, and industry associations. The survey data shows that privacy of payments ranked highest among the requested features of a potential digital euro (at 41%), followed by security (17%) and pan-European reach (10%).

The Eurosystem High-Level Task Force of CBDC has also identified several scenarios which would require issuance of a digital euro. They are namely the rising trend of digital payments, regulatory and financial stability risks posed by private means of payments, and a broad take-up of CBDCs offered by other central banks. During a speech in February, Task Force’s Chair Panetta has also raised the possibility of highly penalizing renumeration on CBDC holdings more than 3000 EUR, aimed at preventing bank runs during acute shocks. Negative interest rates may thus be transmitted to consumers holding digital euros.

Bank of Japan

In a March seminar, BoJ Governor Kuroda announced that BoJ will beign conducting CBDC experiments in the spring of 2021. He stated that while the BoJ has no plans to issue a CBDC, it is still important to prepare for changes in circumstances, from the viewpoint of safeguarding the stability and efficiency of the payment and settlement systems. According to a previous BoJ report, Phase 1 tests will include experiments on the basic functions that are core to CBDC as a payment instrument, namely issuance, distribution, and redemption.

Regional CBDC initiatives

Collaboration between selected Asian central banks

Multiple CBDC (m-CBDC) Bridge Project: Efforts are ongoing to build a m-CBDC i.e. bridge across four central banks across Asia and the Middle East, along with the participation of the Bank of International Settlements (BIS) Innovation Hub.

The central banks of Hong Kong, Thailand, China, and UAE besides the BIS will join the second phase of the Project Inthanon-LionRock, according to a joint statement in February 2021. This CBDC project for cross-border payments was jointly established by the HKMA and BOT in mid-2019, by developing a THB-HKD cross-border corridor network prototype, thereafter allowing participating banks in Hong Kong and Thailand to conduct funds transfers and foreign exchange transactions on a peer-to-peer basis, which helped reduce settlement layers. This was completed in December 2019, with the finalisation of a distributed ledger technology proof of concept prototype.

By expanding this facility, all the participating central banks will explore the new proposed financial infrastructure, in a bid to overcome routine inefficiencies besides higher cost and strict regulatory requirements in cross-border payments. Being one of the front-runners in the CBDC development, this collaboration is expected to back China’s efforts to study the feasibility of commercial transactions in BDCs and across the region. Concurrently, there are also intra country initiatives, including between the Saudi-Arabia and UAE pilot as well as Singapore’s MAS and the Dubai Financial Services Authority, for instance. Over time, more institutions are expected to be attracted to the scheme to facilitate cross-border payments through the establishment of digital currencies.

China’s e-RMB

China plans to expand the launch of its CBDC trial to more cities, with Shanghai, Beijing, Hainan, Changsha, Qingdao, Dalian and Xi’an as part of this year’s agenda, adding to last year’s trials in Shenzhen and Suzhou, with the latter also to be scaled up. There have been notable strides in this space.

Firstly, late last year, 20mn digital CNY was issued to the Suzhou residents by way of a lottery, with another such push to involve issuance of e-CNY worth 30mn was timed with the Lunar New Year. Next, domestic banks are concurrently piloting the digital yuan at Shanghai department stores, where in the retailers are being provided with virtual coupons to incentivise customers to use digital yuan for payments. Thirdly, another notable development was the first digital yuan ATMs launch by the state-owned Agricultural Bank of China, in Shenzhen, to guide residents to adapt to the e-CNY usage and financial transformation. Next, trial usage of the digital currency might receive another lift from the 2022 Winter Olympics preparations (kickstarted by the Beijing metro), which will be the first instance for non-residents to use the digital currency to make payments in China. Lastly, six major government owned banks, including Agricultural Bank of China, Bank of China, Bank of Communications etc., have started to test e-CNY wallet services, involving clients who apply to be a part of the trial, according to the local press.

Authorities have ensured maximum user privacy for its CBDC, which will be fine-tuned to provide ‘controllable anonymity’ to meet needs of the tax compliance and anti-evasion teams. On the side, a PBOC official was cited saying that the official CBDC can be perceived as a backup for major retail payment services like Alipay or WeChat Pay, which dominate the mobile payment market in China.

India warms up to a digital currency, mixed view on crypto

A 2020 survey conducted by the OMFIF revealed that users in emerging markets favoured digital money more than advanced economies. Through the formation of a working group in 2018 and the National Strategy on Blockchain in 2019 and more recently in its latest edition of the Report on Currency and Finance (RCF), the RBI has taken a cautious view on cryptocurrencies, but warmer to the concept of central bank digital currencies. In the latest RCF, the RBI shared few of its observations, without delving into its official stance. Potential benefits such as the ability to monitor financial system developments, promote direct benefit fiscal transfers and channelise consumption to a pre-determined basket of goods and services i.e. as a means of monetary transmission, were alluded to. Offering a balanced view, pitfalls were highlighted by way of a risk of disintermediation of the banking system, if, for instance concerns over a bank’s health prompted the public to convert their deposits into CBDC, raising the costs of intermediation and hurt financial sector stability, apart from seen as a risk of illegal cross border transactions.

The CBDC option might appeal to the RBI, for instance to expand the scope of financial inclusion and backstop the direct benefits transfer of subsidies/ social welfare payments to beneficiaries. Tracing and tracking payments to better capture any leakages alongside capturing offshore fund movements through remittances are other suitable avenues. With the OMFIF survey revealing the broader confidence in these means, the authorities might face better adaptation rates, especially as banking and technological penetration levels improve.

Stance on cryptocurrencies is more guarded with the RBI banning financial institutions in Apr18 to deal with individuals/ businesses who dealt in cryptos within a specified period of time. The country’s Supreme Court overturned this ban in Mar20, but there is speculation that a blanket ban on trading might be on the cards. Recent remarks by the Finance Minister on the need for a framework and a calibrated approach to this asset class has provided some interim relief, albeit practitioners are likely to watch the legislative proceedings over the coming weeks to gain more clarity.

Other recent CBDC developments

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