Paving the way for Central Bank Digital Currencies in Thailand
Author: Somkrit Krishnamra
Partner | Risk Advisory
Businesses and consumers are adapting to digital forms of monetary interactions faster than ever. Innovations in payment systems and technology, alongside the disruption caused by the pandemic, have increased interest in digital currencies. Central banks worldwide are now across various stages of evaluation and development to launch their national digital currencies. Unlike alternative digital currencies, which are decentralized and governed by algorithms, Central Bank Digital Currencies (CBDCs) are issued and backed solely by a central monetary authority. It is a fiat currency issued in a digital form and has the same value as the fiat currency. CBDCs represent legal tender and are a direct liability to the Central Bank, which means that it is more secure and less volatile than other digital currencies.
The Bank of Thailand (BOT) recently announced that they expect to run a pilot test for its retail CBDC from the late 2022 to mid 2023. During this stage, the country will assess how effective the technology is before integrating it into its financial system. The pilot program will be divided into two tracks. The first ‘Foundation’ track will use CBDC for ‘cash-like’ activities within limited areas, with approximately 10,000 selected retailers. The second phase, ‘Innovation,’ will focus on developing innovative use cases, helping improve the design of the CBDC to best suit the Thai financial ecosystem.
Key Drivers pushing the development of CBDCs
- Support digitization of economies
With cash usage declining in most economies, and digital currencies being volatile, CBDCs can play a role in maintaining and streamlining the Central Bank’s function of providing money and financial stability, and ensuring their uninterrupted access in rapidly digitizing economies. Thailand is no stranger to digital payment transactions. By 2020, an average Thai had made approximately 194 e-payment transactions per year. The volume of PromptPay1 transactions had also doubled from 2020 to 2021. According to a study by ACI Worldwide, Global Data, and Centre for Economics and Business Research, Thailand recorded 9.7 billion real-time e-payment transactions in 2021, ranking 3rd globally behind India and China.2
The BOT’s current pilot program focuses on a retail CBDC accessible to public to store value and make payment with. CBDCs can be distributed through mobile devices with a proof of identity, which also eliminates the need for a bank account, thus bringing the unbanked population into the financial system. The roll-out of CBDCs will also generate large amounts of transaction data that can open opportunities for analysis and new real-time economic insights.
- Streamline currency payment systems
Using CBDCs may reduce operational costs and risks associated with managing physical currencies. The adoption of distributed ledger technology (DLT) in digital payment systems eliminates intermediaries and borders, making payments more streamlined and efficient. This open infrastructure platform could foster innovation and increase participation from private players.
Using technology to enhance efficiency in Thailand’s financial sector has been an ongoing topic of interest. In 2018, BOT collaborated with leading commercial banks and corporates in Thailand to launch ‘Thailand Blockchain Community Initiative’, the country's first pilot project for blockchain-based letters of guarantee (LGs), to reduce costs and increase productivity for both banks and clients. CBDCs can be programmed to work together with such platforms to bring about more synergy and even greater efficiency.
- Enhance monetary and fiscal policy
The rapid adoption of private digital currencies could undermine the effectiveness of monetary policy and stability. Depending on the architecture and structure of current policies, CBDCs have potential to improve the distribution of government benefits to individuals, be more transparent and have more control over transactions. CBDCs are an alternative to cryptocurrencies without the associated risks, thus ensuring stability, traceability and security.
As digitization and globalization show no signs of slowing down, CBDCs have an important role to play in providing a safe, risk-free digital medium of exchange, store of value and unit of account. CBDCs can essentially reshape the future of value transfer, creating a more resilient, innovative, and competitive payment system for households, businesses and economies. Ongoing pilots and considerable attention and effort being dedicated to CBDCs globally suggest they will play a pivotal part in the future of payment ecosystems.
1 Bank of Thailand
PromptPay is Thailand’s national electronic payment scheme which allows users to quickly receive and transfer bank funds, using a National Identification number or mobile phone number