Implications of the New Thai Central Bank (CBDC) Digital Currency

The popularity of Bitcoin and other decentralized cryptocurrencies continues to send ripples through the financial world. Private companies like Meta (formerly Facebook) have already started developing their own competing cryptocurrencies, and central banking institutions are also working on similar concepts. The introduction of a CBDC (Central Bank Digital Currency) in Thailand is set to begin in 2022 – but to gauge its significance, one must understand why many believe a centralized cryptocurrency is needed in the first place.

After all, one of Bitcoin’s biggest selling points is that decentralization provides a powerful buffer against manipulation. Central banks can change interest rates and print more money when they need to, but Bitcoin follows a transparent algorithm, has a strict quantity limit, and is specifically designed to resist centralized attempts at manipulation.

Central banks in many countries fear that the widespread adoption of independent cryptocurrencies such as Bitcoin will weaken their control over the financial system. Indeed, many Bitcoin proponents would say that is the point; by removing control from central authorities, the world can democratize its financial systems and level the playing field for all.

As we will see, however, this picture is incomplete – at least for now. Decentralized cryptocurrencies have important characteristics worth celebrating, but in some cases they generate precisely the kind of instability that is not appropriate for a global financial system. CBDCs have the potential to overcome these trade-offs, while adding real value to the nascent cryptocurrency universe.

Bitcoin and its discontents

The emergence of Bitcoin in 2009 represented the dawn of a new type of financial product, whose immense potential would initially be enjoyed only by a select few. Over the next several years, the blockchain-based currency saw surges in popularity, followed by periods of extreme volatility, as well as the diluting impact of hundreds of rival cryptocurrencies.

Although the underlying technology is promising, Bitcoin’s real impact included several unforeseen side effects. What was supposed to be a revolution in financial security has instead become an unstable currency of value, infamous for inspiring a colossal waste of energy through energy-hungry Bitcoin mining.

This new currency also suffered from other types of growing pains. The nation of El Salvador recently made the bold choice to accept Bitcoin as its official national currency, but did not prepare its digital and financial infrastructure for such a move. Less than ten days later, people there set fire to Bitcoin ATMs while protesting the mishandled transition.

Elsewhere, automaker Tesla started accepting bitcoin as payment, then quickly changed its mind due to environmental concerns. Tesla CEO Elon Musk was an early champion of the currency, but later angered supporters by switching his allegiance to Dogecoin, a playful cryptocurrency with a fluffy Shiba inu dog as its mascot. (Naturally, Dogecoin already has its own rival, Shiba Inu Coin, represented by a more intense Shiba inu.)

For all the benefits that decentralization can bring, such episodes are stark reminders of why central currencies are – at least for now – an essential foundation of a functioning society. While Bitcoin and other decentralized cryptocurrencies may have an important role to play in the future of finance, the change they represent requires, at a minimum, delicate and patient implementation.

A possible middle ground

In an effort to incorporate the digital security offered by Blockchain, while preserving the trust and stability of a national currency, many countries are pursuing their own versions of a central bank digital currency.

In Thailand, this effort is already well advanced; a PwC study ranks Thailand first in the world for its CBDC development, sharing first place with Hong Kong. This ranking reflects the CBDC’s well-developed infrastructure, efficient design, and strong software support for cross-border transactions.

Although no country has yet launched a fully functional CBDC, Thailand is closer than many think. The Bank of Thailand is planning public trials of its CBDC in the second quarter of 2022, potentially opening the new currency to general use over the next three to five years. The benefits could be considerable, starting with the possibility for all citizens to easily access a stable digital currency.

A well-run CBDC in Thailand would provide fast and reliable online payment with instant settlement and no processing delays. Digital infrastructure would also make transactions cheaper than current methods allow, allowing for smoother financial exchanges. CBDCs are said to be as reliable as cash and as convenient as a payment app, while providing additional security through Blockchain technology.

Additionally, unlike private cryptocurrencies such as the one Meta is developing, CBDCs have the full backing of their home country. Meta itself is unlikely to go bankrupt – but if it did, the value of its home currency could drop to zero. Each CBDC will be guaranteed by the central bank of its country, in the same way as a standard currency. No ordinary company, not even a private bank, can make a similar promise for any cryptocurrency it decides to develop.

Yet even a well-managed CBDC can introduce indirect risks into the financial system. In an extreme scenario, if enough people transfer their savings from standard bank accounts to CBDC accounts, banks may not have enough cash on hand to fund those transfers. The resulting loss of public confidence could also cause more people to withdraw their funds, leading to a run on the banks.

Such an outcome can almost certainly be avoided with a gradual and well-managed transition into the new, more mature era of cryptocurrency. Yet, it should nonetheless serve as a reminder that we are entering uncharted financial territory and that every step forward should be taken with caution.

Finally, it should be noted that many supporters of Bitcoin (and its peers) fundamentally disagree with the effort to tie new cryptocurrencies to central banks. Decentralization, they would say, is a feature rather than a bug – preventing manipulation by central authorities. According to them, transparency and neutrality are primary objectives that can only be achieved through the free market.

Guide to an Unknown Future

The impending arrival of CBDCs raises many questions: will each country regulate its cryptocurrency in a different way, or will one set of global standards become the new norm? How will software bugs be handled if they affect international transactions? Will the viability of CBDCs cause more governments to crack down on unregulated cryptocurrencies, such as Bitcoin?

As digital currencies mature, businesses and investors will need to understand the complex legal and practical issues surrounding their use. Even though regulations change over time, our team can help you make informed decisions and get the most out of your investments. Contact Kudun & Partners today to find out how.

Sylvia B. Polson