Retail CBDCs Are Off To A Slow Start In Asia

The hype is being separated from the reality when it comes to retail central bank digital currencies (CBDCs) in Asia, and adoption is underwhelming. Nearly five years after China launched its first digital renminbi (e-CNY) trials, only two other Asian countries actually have a functioning retail CBDC: India and Cambodia.

Elsewhere in the region, various pilots are being conducted that may or may not lead to digital fiat currencies being launched in Japan, Korea and various Southeast Asian countries. These countries are hedging their bets and closely watching the early adopters as they weigh their options.

Who Needs The Digital Yuan?

When it comes to China’s much-discussed CBDC, there is no doubt that in the wholesale segment, it may play a significant role. The central banks of Hong Kong, Thailand, the United Arab Emirates and Saudi Arabia are working with Beijing and the Bank of International Settlements (BIS) on the ambitious cross-border Project mBridge.

Yet while central bankers along with commercial banks can dictate the terms of mBridge, adoption in the retail segment requires consumer interest. And when it comes to digital payments, China has already built a mature, comprehensive ecosystem undergirded by the duopoly of Alipay and WeChat Pay. There is very little that the digital renminbi can offer Chinese consumers that they cannot already access through existing payment platforms.

For that reason, the Chinese government has tried things like paying the employees of state workers in digital yuan. Workers indeed are receiving their wages as e-CNY, but they are then promptly transferring them to their bank accounts to spend as cash. It is not hard to understand why: Options for using the e-CNY both online and offline are limited, while Beijing has not sufficiently addressed privacy concerns around the digital fiat currency.

The People’s Bank of China recently shared total transaction volumes for the e-CNY, which reached RMB 6.6 trillion ($910 billion) through May 2024. Given that the overall China payments market is valued at roughly $40.3 trillion, we can see the e-CNY has a long way to go before it accounts for significant transaction volume.

The Digital Rupee Loses Momentum

In January, it was reported that India’s digital rupee (e-rupee) transactions had surpassed 1 million in a single day – but not whether that milestone signified the median number of daily transactions using India’s digital fiat currency. When details emerged that bank employees had been encouraged to participate, we suspected that this milestone was more about reaching a target that the Reserve Bank of India (RBI) had sought to hit by the end of 2023 than a sign that digital rupee adoption was on the rise.

Amid lukewarm interest in the digital rupee, the RBI said in May that it would be made available offline. One has to wonder just how useful that will be for consumers. India’s existing digital payments system is already very successful, if not quite as developed as China’s, while cash remains popular for physical transactions.

In late June, Reuters reported that use of the e-rupee had cratered to just 10% of the peak it reached in December 2023. One source – a banker involved in the project – who spoke to Reuters said that “this shows there is little organic demand to use the e-rupee.”

Meanwhile, the transactions that are continuing are occurring in part because banks are disbursing benefits to their employees via the e-rupee, all four of the sources who spoke to Reuters said. This translates to increased transaction volume at the end of each month, but not a sustained uptick.

Cambodia Is The Exception

While retail users have limited interest in digital fiat currencies in China and India, they are flocking to Cambodia’s Project Bakong, which surpassed 10 million accounts (60% of Cambodia’s population) in December 2023. The National Bank of Cambodia (NBC) jointly developed Bakong with the Japanese blockchain technology startup Soramitsu, launching it in October 2020.

Bakong is probably best described as a blockchain-powered retail payments system managed by the Cambodian central bank that allows interoperability among the different players in the country’s payments landscape. The Cambodian government launched Project Bakong because it believed a retail CBDC could accomplish three key policy objectives: boost financial inclusion—at the time of Bakong’s launch about 75% of the population was unbanked—improve digital payments infrastructure and eventually reduce the use of U.S. dollars in everyday transactions.

Working with Soramitsu, the NBC ensured that transacting with Bakong would be simple and fast. The Bakong e-wallet requires just a phone number or QR code to transfer money or make a payment.

In essence, Bakong is something of a digital payments first mover in the vein of Alipay in China 20 years ago. For that reason – and given the strong backing it has from the Cambodian government – we expect it will become a foundational part of Cambodia’s digital payments infrastructure.

It’s All About Utility

Although the central banks of both China and India are keen to promote adoption of their respective CBDCs, we do not think those efforts will bear fruit if consumers do not find them useful. Both China and India have already been highly successful building digital payments infrastructure and neither the People’s Bank of China (PBOC) nor the RBI has made a convincing case for why retail use of a CBDC confers significant benefits on users. If anything, retail users remain hesitant to use digital fiat currencies because they are concerned about use of their data and their overall privacy. Central bankers who fail to assuage these concerns may find that their CBDC projects continue to lose momentum.

While both Japan and South Korea continue to experiment with the digital yen and digital won respectively in pilots, as advanced economies they have even less practical use for a retail CBDC than China and India. To be sure, Japan has ambitious cashless goals, but it can achieve them with existing digital payments infrastructure. It only needs to boost adoption. Building new infrastructure for a digital fiat currency would be overkill.

That said, there is one developing country in Southeast Asia likely to adopt a CBDC in a similar manner to Cambodia, and that is Laos. In fact, Laos is working on a CBDC pilot with Soramitsu that began in 2023.

CBDCs make the most sense for countries with pressing financial inclusion needs and limited existing payments infrastructure. Laos checks both of those boxes. It has GDP per capita of about US$2,600, higher than Cambodia and Myanmar, but behind every other country in East Asia. Further, less than 30% of Laos’s adult population has a bank account.

There is an additional potential benefit for Laos of adopting a digital kip. If Soramitsu implements a similar version of Project Bakong in Laos, having the same CBDC infrastructure could facilitate seamless cross-border payments between Laos and Cambodia.

As for the launch of the digital kip, that remains uncertain for now, as the pilot is still ongoing – in its second phase – and the Laotian central bank has yet to comment on the matter. However, given that Laos has a National Digital Economic Development Strategy for 2021-2030, it is likely that if Laos moves forward with a digital kip, it will do so by the end of the 2020s.

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