CBDCs IN ASIA

Michael Salmony 0:12

Hello, my name is Michael Salmony and Ralf and Javier would like to welcome you to another episode of the Payments Trilogue. And this time we have a guest from Asia, Musheer, who is the founder of FinStep Asia and knows everything and everybody in the region. And I had a very interesting chat with him about CBDCs, which we thought it might be worth sharing because many of our perceptions, including mine, I must admit,

is that CBDC is sort of on the decline. There were about

Syed Musheer Ahmed 0:43

Mm-hmm.

Michael Salmony 0:44

130 odd central banks working on this after the Libra shock. Now, then there were 11 CBDCs live and now three. I think it's Bahamas, Jamaica and Nigeria and all those three are not really going anywhere. So...

We are not entirely positive about CBDCs, so very happy to hear a contrary voice who will now convince us that maybe CBDCs are the new sliced bread of payments. So welcome, Musheer, maybe you can tell us a little bit about yourself and about those CBDCs that you're

Javier 1:19

.

Michael Salmony 1:20

a champion of.

Syed Musheer Ahmed 1:21

Sure. thanks Michael Ralf and Javier for having me. I'm not sure I'll be able to do much of a great job convincing about the absolute need for CBDCs, but maybe a few use cases that have some potential going in. my name is Musheer Ahmed. As Michael mentioned, I'm the founder of FinStep Asia. We do work around policy and regulations, in particular for fintech and digital assets across Asia. We are based in Hong Kong, but also cover

The broader greater China region, as also India and the Middle East. My background was in capital markets for the first decade of my career and the last 10 years or so in FinTech, co-founded the FinTech Association. A couple of years ago was part of the founding team of the Virtual Assets Regulatory Authority of Dubai. I have also had external consultation roles with the BIS Innovation Hub looking at tokenized carbon credits at the same time that M-CBDC mBridge was running and

was also an external advisor to Stellar Development Foundation for Asia, where we were also exploring in 2022 CBDC use cases using the Stellar blockchain. So pleasure being here and I'm looking forward to the conversation. And I'm probably also looking to see if I can be convinced otherwise on the absolute no need for CBDCs. I do think they're in four or five years time with Agentic, they may be a different conversation, but looking forward to this.

Michael Salmony 2:46

Well, thank you, Musheer, for your very impressive introduction and tokenized carbon credits sounds like another very interesting topic. Maybe we can delve into another time. But maybe you can

Syed Musheer Ahmed 2:55

Yes.

Michael Salmony 2:56

tell us about the CBDCs that you're seeing and how they're doing, what problem they're solving

and

Syed Musheer Ahmed 3:01

Sure.

Michael Salmony 3:01

how they're going.

Syed Musheer Ahmed 3:03

Thanks. I guess you look four main ones that we can talk about and please stop me or you know jump in whenever you have a question or a point to make. I'll just quickly go over the four of them. Primarily the Hong Kong CBDC, which is the e-HKD, the e-Renmimbi or e-CNY, which is the mainland Chinese CBDC run by PBOC.

Then you're looking at the e-Dirham, which is run by the Central Bank of United Arab Emirates, and the e-Rupee, which is run by the Reserve Bank of India. These are the four, obviously covering interestingly enough, two 1.5 billion populations and two roughly seven and a half to ten million populations, right? So you have two different types of economies, one very large, and who have experimented on the retail side of things.

while the two small ones have largely, I mean, it Hong Kong has primarily looked at e-HKD from a wholesale CBDC perspective, while the UAE CBDC is looking at both, but there is a strong retail CBDC element to their process, right? And then when you look at India and China, like so let's start maybe with China, probably the largest in terms of deployment, right? and they have done quite a bit.

When it comes to PoCs, as well as number of transactions, probably goes into a few billion transactions, or value of transactions rather, and a few million users, I think 250 to 300 million users trialed on the e-Renmimbi over the last few years. And you have an interesting proposition where they have incorporated and added in the banks as also the big payment players like Alipay, WeChatPay and the e-commerce players like JD.

into that PoCs, right? Rather than keeping it limited as a trial that the central bank is running. and I think I showed Michael this very briefly last time. As a Hong Kong resident, I also get access to the e-CBDC. And they have an e-CBDC app, which in my case I I downloaded the one that's being offered by Bank of China and that allows me to top up using Hong Kong dollars, using my digital payment means and then potentially use them

locally in mainland when I'm visiting. Right. I did try that, not so successfully, I may add. could be down to language barriers of explaining things because I don't speak Mandarin much if any. but that's one. I think the second thing with the PBOC, HKMA and the CBUA, the central bank of UAE, is the mBridge project. I think that is probably the one that most of us in Hong Kong have watched very closely.

Right. mBridge started about four or five years ago, or I think yeah, roughly about five years ago, as a project commissioned by the BIS Innovation Hub in Hong Kong to experiment cross-border CBDC transactions, in particular between four economies, which was Hong Kong, UAE, Thailand, and mainland China. Right. it was in a sense a buildup from where you had a bilateral

Wholesale CBDC project that the Monetary Authority of Hong Kong was running with the Thai Central Bank, so the Bank of Thailand, right? For looking at e-HKD on one hand and the ETH Haibat on the other. And you had banks participating, and then there was this conversation of exchange of tokens between the two central banks, which so if you are a bank, you'll go acquire your

CBDC tokens from say a bank in Hong Kong from HKMA, then the transfer is festived by HKMA to C B to Bank of Thailand and then paid out through Bank of Thailand to the bank. So it was very much a bank-led process, Javier. So probably you're happier about the banks being the primary focus. And that's what's been the focus on mBridge, right? Wholesale CBDCs. and then it progressed to say, okay, this is two country bilateral. How do you bring in more countries? And that's where the four central banks or from the

Chinese Perspective PBOC's Research Institute was leading the efforts, came together to then run PoC. That went into a few million dollars as well. And then they published this two years ago. Subsequently, the BIS has decided to hand this over to the central banks to operate as their own platform, which will then be independently run from the BIS and be operated by the central banks. The Saudi central bank, SAMA, Saudi Arab

Saudi Arabian Monetary Authority have also joined as of some of the of the among the five core participants, and there are other observers from the region who are watching and may participate in the future, right? So that's on the Hong Kong side broadly, and with China, we've seen the experiments quite big, and now they're looking at what next. On the India side as well, it's probably yeah, I'm gonna stop Ralf. Yes. Yeah, of course. Yeah, please step in, yeah.

Ralf Ohlhausen 8:05

hang on hang on a second b before you go on, if you don't mind. there's there's already

there's already so much to unpack here

Syed Musheer Ahmed 8:14

I'm telling sure.

Ralf Ohlhausen 8:15

that maybe starting off with the mBridge, as you

Syed Musheer Ahmed 8:22

Yes.

Ralf Ohlhausen 8:23

just explained, one of my questions on that particular one would be how these

Well, the the connected CBDCs differ. So what what sort of mapping or interaction or hubbing role is there that has to well map one system to the other? So what what are the main differences maybe between those systems and then how is that being bridged?

Syed Musheer Ahmed 8:54

Very good question, right? And before I and I should have said this earlier as a disclaimer, none of these views are of my previous employer or clients. all of these are my individual views as such, considering the the topic and the people we're talking about. two elements to it, I guess, Ralf. The when we're looking at the BIS Innovation and hubs mBridge project, there they had brought in a couple of technical providers to build that platform, right? Which would then connect the different chains and

I mean if you c and if you can call them semi public or more so private DLTs, right? I don't know some of them are not necessarily fully decentralized in the blockchain world as such, with a lot of control that the central banks have. So the platform was so you d you did have technology providers who came in to unify the the CBDC processes and then the platform would then facilitate that exchange between the different banks and the transaction, which is then

All of the tokens are provided by the central banks whenever there is a need, right? That's number one. Number two is now that the new entity has just been incorporated a couple of months ago in terms of formal legal entity that will take over, a bit similar to what we have seen in Southeast Asia with Nexus, right? and if I may just indulge your audience, I'm sure all of you are aware, but for the audience, just very quick, 30 seconds introduction. Nexus was also a BIS innovation hub project.

That came out of their Singapore office. And that was for interconnection of real-time payment systems in Southeast Asia, Singapore, Malaysia, Thailand, Philippines, Indonesia, et cetera. And that was again run as a PoC through BIS, and now it's been handed over to an operator who have then been doing the RFPs and then will be operating the system as a jointly owned.

Entity between those central banks, right, to facilitate those transactions. The same thing is happening with the mBridge project now, where there are tenders out in terms of the build that will take place. So we are now in that first phase PoC done, validated, proven in terms of what can be done and to a decent amount of scale, largely with bank participants, right? So a variety of banks from each of those jurisdictions participated, the four jurisdictions we spoke about. And now it is to commercial. I'm using the term commercial.

Loosely, but essentially to build it out as a standalone entity with ownership by various central banks, and then it'll operate as a neutral platform among these users to then facilitate the transactions between the CBDCs. I hope that addresses the elements. So, in terms of the full technical details of how that will come through, etc., is in the works, and we probably will get some more information in the coming months. Especially I'm looking forward to conversations around the

time of APEC, which is gonna be held this time in southern China. So yeah, Hong Kong and Shen Shenzhen, but also finance ministers, etc., will be meeting in Hong Kong. So sorry Michael, go ahead.

Michael Salmony 11:58

Can

I just jump

in there? I I also think the mBridge is a really interesting project. And I think it was born of the idea

Syed Musheer Ahmed 12:05

Yeah.

Michael Salmony 12:05

when all the central banks around the world were all creating their own CBDCs that one could then connect them all and thereby create

Syed Musheer Ahmed 12:12

Correct.

Michael Salmony 12:12

a new global instant system. That of course isn't happening because not many banks are doing CBDC anymore. But

Syed Musheer Ahmed 12:17

Yeah.

Michael Salmony 12:18

I still think the idea of connecting those that are doing it is a good idea. And mBridge seems to be the leading project. So I'm totally with you there.

Well, I'm not quite so convinced, if I may say so, is on the e-CNY,

Syed Musheer Ahmed 12:27

Shop. Mm-hmm.

Michael Salmony 12:30

the Chinese one. That's been going for years and the adoption rate, don't know, a few tens of millions of users who are not really active in a country of one billion is not that impressive. And also the central bank of China seems to have also realized that. And they said they started introducing interest on CBDC to try and make it more attractive.

Syed Musheer Ahmed 12:52

Yes, correct. Recently. Yeah.

Michael Salmony 12:54

They've now got the banks in, as you mentioned. In fact, I'm hearing now that they are changing the model. It's not backed by central bank money. It's actually backed by commercial bank money. That all doesn't sound like it's a huge CBDC success story. Or am I reading something wrong?

Syed Musheer Ahmed 13:10

I think we sometimes are looking at CBDC as probably delivering a lot more than it can, or as a as a standalone driver of everything monetary policy or let's say money generation or money transaction in economies, right? Probably that's where we're holding this to. I view CBDC is very differently to that conversation. For me, CBDC is an added proposition.

To your monetary system, which gives you more flexibility in terms of executing a variety of different elements that you may not be able to do with the current technology or your money supply, right? So I'll take three examples here. Number one being the fact that you still have cash and digital money running in parallel in many systems. And in digital money, you have multiple, forget the blockchain story, you have RTGS, you have real-time

payments, you have Swift-based payments, etc. So you still have multiple ways that people are operating among digital money, which all have slightly different propositions in terms of maybe the amount of value that you can transact through these entities, or it could be the case where we are looking at you know certain features that get added on, right? Or for more larger scale or for retail for small scale, like UPI in India. So I think CBDC is.

At the time it was initiated very rightly, as Michael mentioned at the top of the podcast, it was a reaction f to the Libra project, right? Where everybody we're like, you cannot have a two billion people private entity with questionable ways of operating in terms of governance and other elements to control your monetary policy for many countries, and that could have caused chaos. And rightly, rightly so, I would imagine that the central bank stepped in. And it was also where Bitcoin was threatening

and others crypto were threatening to take a lot of the cross border flows away or capital market capital controls break or breaking capital controls in many of the countries, right? So you had to fear and you're like, okay, we need control. As as as Ralf also mentioned, central banks need control. they have to be in a strong position and that was the reaction. Now a lot of probably millions, if not tens of millions of dollars have gone into CBDC projects and some of the large ones

Including

India and China, who have a 1.5 billion population, have put in a lot of effort into it. And we've now seen the maturity of blockchain and other elements, plus regulations kicking in that are providing alternatives to the need for a CBDC. So I see it as an alternative. I see so one was like the differentiation. The number two is programmable money, right? I see programmable money as the big use case, not necessarily as a driver of financial inclusion.

There are other ways of driving financial inclusion without CBDC. But the effectiveness of digital money through programmable money is where I see the biggest use cases of CBDC. So a classic example is subsidies that the government have to give out, right? Or grants that they give out specifically. In countries like India and in mainland China, you have a large agrarian population or you have a large population.

That may need government support for a variety of different elements, like farmers, right? Classically. And when you make those payouts, even if it goes through the system cleanly, the use of that proceeds, right, that they have got. There's a reason, say buying seeds, buying f machinery, etc., or for labor or other elements, may be misused. Not 100%, but some of it may be misused or be diluted. Through programmable money, you can actually ensure that things happen exactly.

for those use cases because you're limiting where the payments can be done, right? And it only goes to a certain person's account yourself.

Ralf Ohlhausen 16:59

Yeah, and if you don't mind,

here I I already would like to well point out the difference between the plans here in Europe with the digital euro and what you were just describing as one of the big and important use cases here. The ECB is adamant that it will not be any form of programmable money. Programmable payments, yes, you know.

Automating payments but not limiting the use of the money itself. So it's it's the the the it's the most outspoken thing they say they do not want to do. Categorically, no. And you're just saying that is the sort of opposite. there in Asia, it is a very important use case. And I think

That's already one of the big differences to be

Syed Musheer Ahmed 17:52

Yes.

Ralf Ohlhausen 17:53

to establish. I I'll I'll come with other ones probably going on. But so but I just wanted to point that out and but please continue.

Syed Musheer Ahmed 17:59

Correct.

I think you you're very right. And I'll give you a personal

example, slight segway, maybe, right? And I think that is very important for people to get to understand that. So I moved to Hong Kong 12 years ago, almost to the day. Like it was the 29th of July, 20th, 2014, that I moved to Hong Kong. And I came from India where I was so used to even at that stage, you know, our online websites for our banks are pretty good. You started having digital payments.

tap, etc. And people were very mobile friendly or very used to using mobiles for even though a smaller population had access to smartphones at the time, we were very used to it. And in mainland it was the same thing. I spent a month in mainland. So WeChat was my dominant use case, right, at that time. I was using WeChat so both for payments as well as for my communication. And when I landed in Hong Kong, it was quite shocking for me how I'm gonna use the term backward, but let's say limited

The use of mobile money was in Hong Kong, right? And this was a developed economy, 50,000 plus US dollar per capita income, three, I mean 2.5x per person, mobile phones, largely smartphones, right? So it wasn't a technology issue. It wasn't, and everybody had three, four credit cards, especially in the professional world, right? So the reasoning there was most people did not trust mobile phones and technology for money because they were skeptical of scams or you know, phishing, et cetera.

And they already were used to tapping cards and it took the same time pull on pulling out your phone and tapping or tapping your credit card, you know. So Apple Pay hadn't yet been fully integrated. And it used to always fascinate me how people respond to online apps and using transactions. That was just down to a different use case where they had been used to having money, high ATM penetration, right? one of the highest per capita, I think the second largest after Macau, where Hong Kong has the second largest ATM penetration.

So people were used to cash everywhere or using their credit card. So mobile was very difficult. Whereas for people from the developing economy, it was a whole different use case, right? We were used to cash, but digital gave us access. It probably for a lot of people their first account was a payment account. And in Southeast Asia, you see the same, as also in mainland China, right? So being able to easily transact, this made a big difference. E-commerce is mu was much larger, both in China and India. It's it's

I order things here in seven minutes, right? And in in India, that's groceries to drinks to electronic items, you name it. Amazon delivers within seven to eight minutes in my I'm in Bangalore, so yes, urban area, site central. So that's their maximum 20 minutes, right? Now that is the same in in mainland China. So use cases are very different. Whereas in the developed economies, you have a different consumer habit that kicks in. So that's number one. So in a similar way, when you look at the subsidy conversation.

In the developed economies, I feel there is these conversations on privacy, the need for less control of your money, et cetera, the right to the money. In developing economies, unfortunately, the reality is there is a level of leakage. Let's put it that way, right? Whether that's through corruption, whether that's through somebody taking their cut, whether that's to bad habits of the end users themselves, right? Like in India, you have large use c payouts or subsidies that are given for women.

Especially the rural women, some for building their businesses, some for other purposes, which could then potentially be usurped by a male family member. Right. So if you wanted to ensure the last cent or PESA or

Javier 21:34

you

Syed Musheer Ahmed 21:35

Renmimbi goes to the person who is the intended user or and for that purpose, programmable money does that. Yes, there is more control. Yes, there is this element, but it's a bit like I'm and I'm using this very crudely.

When you're given food stamps or you're given other elements in many developed economies, which are specifically for a purpose, which is here, you have a food stamp where you're gonna go and give it to that you know kitchen, community kitchen to acquire your food or to the supermarket and buy your food items. It's not too different, right? Here it's just the government giving it direct money, so using a coupon. It's saying here's your essentially your coupon to go to the seed shop in the farmers and to buy only those seeds.

That's maybe the simpler way to put it. I don't know if that makes sense in this aspect.

Javier 22:28

What most attracts my attention is the difference in between the different initiatives and

Syed Musheer Ahmed 22:34

Yeah.

Javier 22:34

the different regions and countries supporting each initiative. So my

Syed Musheer Ahmed 22:41

So

Javier 22:41

question is, is there anything in common in all of them or is it just to me? As you are explaining, it is like from the very beginning when CBDCs were just invented as a reaction.

out from fear and lack of knowledge of what was happening with cryptocurrencies and all that. Now it's like in different places those initiatives have been roaming looking for something to do and finally

Syed Musheer Ahmed 23:11

Yes.

Javier 23:11

they have found something that suits the rapid type and they have finally find a usage for this CBDC. But is there anything in common in the different projects or is it just

a different requirement from each local circumstances that still provide some life to these CBDC projects.

Syed Musheer Ahmed 23:36

Great question, Javier. I I think I liked when Michael said I'm from Asia. usually India is not included in the Asia conversations. People refer to that, but yes, I'm in Hong Kong and India. And the UAE also pull into the the Middle East into Asia. But it is the conversation, unlike in the in Europe where you have a a unified monetary and economic system, right? So where you can look at it as a holistic picture, here you have very different

economic systems and economies at different stages, right? Ranging from the very well developed Japan or economies like Hong Kong, Singapore on one hand, to the upcoming economies like Laos, Cambodia, and others who are still in the early and then India, Southeast Asia, UAE, etc. Right, you know, lying in the middle there. So you do need to be the applications will vary. There are some commonalities and I'll break that down. One is I think for large populations, I'm talking about

fifty to hundred million plus or the Hong Kongs, sorry, the the mainland China, the India, Thailand, Vietnam, these countries, I think there is quite a bit of conversations around some retail use cases. And quite importantly and to also realize is most of them, if not all of them, have capital controls. Right. So it's very much an internal from a retail perspective, it'll be a very internal use case that you're looking for. And they all have significant government schemes that they operate.

For supporting a vast num vast amount of population, right? Whether that's politically driven or ideologically driven, that is the reality of it all, right? So that's number one. Then you have the developed economies and also some of these large economies like India and China, who are also looking at the wholesale CBDC conversation, right? And this is the I think Michael in our podcast a few weeks ago, we we were delighted to have him there, also mentioned about how essentially a CBDC is a tokenized central bank deposit.

Right in in all senses. And we're now seeing this conversation on tokenized deposits and cross-border tokenized deposits. But the CBDC probably is one step ahead from that tokenized bank deposits because the frameworks for tokenized bank deposits are still being built. But for CBDC already has that from a legal and regulatory perspective. So you could use that as your proxy and run that between banks where there isn't so much conversations around programmable money, it is about speed and efficiency that you can do.

And third thing to keep in mind, and this is not a de-dollarization conversation, but efficiency conversation around cross-border trade between these economies in Asia in particular, right? Say 10, maybe 25 years ago for sure, but especially over the last you would say 25 years ago, most of them will not have high amount of trade, cross-border trade between their economies, right? The Southeast Asian economies between each other. It would probably be with one main country or with in with China, maybe and largely with Europe or US.

in terms of cross-border economic activity. Now that has increased significantly. There's more movement of people, businesses, and others. So it starts becoming the question of how do you overcome the need for dependency on the dollar as your conversion currency, right? The physical need, because the correspondent banks need it, physical being, of course, digital or otherwise, but the fiat need of the dollars so that you then are doing your conversion from.

Currency A to the US dollar and then paying out, converting the US dollar to currency B, right? Which is both inefficient and expensive. Now with the CBDCs, you can then use the US dollar rate as your reference, which is what the mBridge also did, right? So this is not to take out to be de-dollarization, but it's about efficiency. When you have two economies that are having billions of dollars and moving into trillions of dollars of economic activity between each other, there needs to be a more efficient way of that central banks working together.

And the recognition that these economies and their currencies are also important. So use the dollar as your reference rate because for the fluctuation of the value, but from an economic transaction perspective, you can then use the CBDCs, which I do think tokenized bank deposits could replace in the future once you have the regulations and the scale, plus infrastructure. And the last piece I think is very important on that element is.

Although we are hearing so much noise around tokenized real-world assets, in particular financial assets, bonds, deposits, stable coins, the reality of it is outside of a few jurisdictions, most countries do not have the infrastructure for tokenized deposits, for tokenized money, let's put it that way. Forget deposits or otherwise. Even in the US, I would challenge that outside of the tier one, tier two banks, you probably don't have that, right? And this is the most developed economy. Europe similarly.

Even in Hong Kong, Singapore, which have been a fairly advanced when it comes to both as being financial centers, so you do have scale in terms of the number of organizations, I would challenge that beyond the big tier ones and some tier twos, most other banks and in financial entities do not have that infrastructure. So now, if even if you get tokenized bank deposits, can that be translated at the final end? No. So the CBDC project, because the central bank is driving that, that helps.

From an infrastructure perspective to a certain extent, right? And then the conversation about and that's that's probably for me why there is this distinction on the activity. There is one, I find the UAE CBDC project as very fascinating. I think it's also not being given enough attention that it deserves, largely because of how they are applying use cases, right? Number one, most of the ra regulators in Asia have started talking about the CBDC not being a bank account, like the account holding the CBDC.

Is not a bank account, it's a it's a wallet, right? So the KYC, the AML requirements come down. They don't disappear, but they come down, right? And then obviously the operational costs also come down. So see the UAE, for one example, was that okay. If people are coming into the UAE tools, or otherwise and they need to spend, they can just set up a CBDC account and then they use the Etherum for their spending. So it's just one transfer that takes place.

The second one is because the unique nature of UAE among other Middle Eastern countries, where they have a significant number of blue-collared workers, right, who are from South Asia, Southeast Asia, parts of Africa, and other Middle Eastern countries who typically have a very restricted bank account. So the money is paid out into their accounts and then they withdraw. I mean, this is common in malls in Dubai, right? You'll see huge queues on like maybe today, tomorrow there'll be huge queues.

At the ATM where people are withdrawing cash, and then you'll see huge queues outside of Western Union and many of those money exchanges sending money back to their home countries, right? Now that's because the banks are not processing, or the banks charge a lot, and it's a more complicated process for these people to understand. So one of the use cases the CBUAE has mentioned is okay, why don't the payment to these about four million blue-collar workers approximately, right, in the UAE out of a resident population about 12 million, so about 30 percent.

33% are them. You give them an e-CBDC, right? Then a fintech can build the process to transfer that out and remit it into India, Pakistan, Philippines, wherever there is the need, right? At a lower cost, likely, and at a much faster pace. eliminating the remittance players, not necessarily eliminating, but reducing at least the burden, which makes it very interesting, right? and also a valid use case that can be done. So

I'll take a pause there, yeah, I thought that's something to watch out for is what CBUAE is doing both on the retail and they're also trying to participate

on the

Michael Salmony 31:20

Yeah.

Syed Musheer Ahmed 31:21

wholesale CBDC with mBridge. But on the retail side, I really like these two that they're trying to build out.

Michael Salmony 31:29

I'm quite a fan of the digital Diram as well. It seems to have the retail side, the wholesale side. They have some interesting use cases. mean, like you mentioned that even foreign visitors can get a CBDC account and use it immediately. And

Syed Musheer Ahmed 31:43

Yeah.

Michael Salmony 31:43

your use case that people queue up on ATMs and get the cash out on salary day and then go straight to Western Union to send it abroad, that surely is not the optimal solution.

So they're really solving some problems and they're doing a lot of great stuff. So the digital Diram I would also put as one of the good candidates. But we haven't talked about India and I'd

Syed Musheer Ahmed 32:04

Yes.

Michael Salmony 32:04

really like to like your take on that one. mean, India is famous in doing a lot of things right in payments, know, UPI, et cetera, one of the biggest

Syed Musheer Ahmed 32:10

Yes. Yeah.

Michael Salmony 32:12

success in the world. Why does one need a digital rupee as well?

Syed Musheer Ahmed 32:18

India is a fascinating use case. But you could also argue that from a digital payment side, China's also been fairly successful, at least from the private rails perspective. India, I think number one, we have looked at, as I mentioned, the government subsidies and programmable money, I think is a very, very important use case. lesser known fact: over the last 10 years, 500 million people have been given bank accounts as part of an initiative called Jan-Dhan Account. Literally translates to wealth.

for the people account, right? These are no-frills accounts, which are operated by state-owned banks. Most of our large banks are state-owned and they have a wide reach across India to bring in people who were close, you know, about 500 million people who did not have bank accounts and whose status was closer to the poverty line below or nearby, right? Which is a big financial enabler. And those accounts were largely also to facilitate

government payouts or other elements other aspects of that. Now with the CBDC, this is the next step is to make sure when these subsidies and others are paid out. India has a very large agrarian economy, right? quite a few hundreds of millions of people are involved in the agrarian economy in India, as an example. And then each state government also has various schemes which help factory workers and those who are lesser off, right, to support them, both as a

As a social measure, but also as part of their promises during the elections. So keeping that in mind, I think that's one key use case. Second thing that we're starting to see is and I wouldn't I'm not necessarily saying this is being replicating what's being done in Hong Kong, but the RBI has started doing a lot of PoCs around tokenized government bonds and the using the CBDC as the layer for payouts. You can't, as as you all are aware, you don't need a CBDC or tokenized money.

To facilitate transactions or payouts or pay ins when you are doing any RWA transaction, you could connect it to a digital payment and that becomes off-chain-on-chain conversation. But they are exploring this. Hong Kong Monetary Authority is probably one of the leaders globally, but definitely in Asia when it comes to issuing tokenized government bonds. And they've done billions of dollars worth of these bonds, and then the e-HKD becomes from a PoC perspective, and now moving more to real-time basis.

One of the payment options, right? So when I was with so my w the project I did with regards to tokenized carbon credits was Genesis 2, Genesis 1 project was was the tokenization of the Hong Kong government bond, right? That was and was to be used where people can pay using even the octopus card or travel card and the OG of payment cards, where about 100 Hong Kong dollars, about 12 USD could be the minimum to buy a government bond.

Right. Now, India is also looking at that. They've started with some government bonds that can be transacted through CBDC. For me, my one of the things I do feel India should consider now is India is actually now looking at it. Today or tomorrow, RBI is hosting, actually today in an hour or so. RBI hosts these regular interactions with the with the industry. Today they're going to be focusing on tokenized assets. Right. over the last six months, there's been a significant acceleration.

In the conversation around tokenizing real world assets, in particular property and land and et cetera, infrastructure projects, which some governments, state governments have started pushing for, including Maharashtra, which is where Bombay is, and one of the highest revenue generators of India, Karnataka, which is where I am, where Bangalore is again one of the top revenue generators for the country. both of these states are looking at this in earnest.

So the way I see it is if you don't have CBDCs, which I don't expect in India for a few years, because RDI's position has been very clear on that. You don't have any cryptocurrencies. Bank deposits are really very, very nascent in the country, not because they can't do it, but willingness and just general regulatory support in the early days. So now what you're seeing is the e-CBDC could become the transaction layer for tokenized assets, right? Regulated tokenized assets in India, including when we go to the phase of tokenizing equities.

Because frankly speaking, most capital markets are locally focused, not cross borders. So that's where I see some of the major focuses that even the RBI is putting into. And then we will probably see

RBI gone please, yeah.

Ralf Ohlhausen 36:45

Could I could I ask you it could

could I could I come back before we run out of time, could I come back

Syed Musheer Ahmed 36:50

Yeah, yeah.

Ralf Ohlhausen 36:51

to trying to compare the plans in Europe with the actuals

Syed Musheer Ahmed 36:55

Please.

Ralf Ohlhausen 36:56

in in in Asia? And so maybe two or three of the main design choices that that we are doing here on the digital euro. One is imposing a holding limit,

Syed Musheer Ahmed 37:09

Mm-hmm.

Ralf Ohlhausen 37:10

which then

necessitates what's called a waterfall and a reverse waterfall from from your other bank account commercial bank account to go back and forth to overcome well the holding limit and second the commercial model that there is no charge that consumers will not be charged for using it leaving so the issuer bank cannot charge their the payer so the only therefore party who is gonna pay is the merchant

in a

Syed Musheer Ahmed 37:41

Yeah.

Ralf Ohlhausen 37:41

retail payments scenario and then therefore there must be an interchange equivalent back to the issuing side otherwise they wouldn't they would be stranded without any income. So is that are those design choices also somewhere in Asia or none of them?

Syed Musheer Ahmed 38:02

I think they're being considered like holding limits probably will look at it over time. We have that tiered structure in place in any case, right? And then transaction limits, I I would see more transaction limits than say holding limits to begin with. secondly, I think the the key element that sometimes gets underlooked is with the EU, although you are an economic union, you do have central governments and local economies having their own say and you know.

Different views in in terms of even the CBDC. So then implementation, even if they're supposed to, becomes very different. And we are seeing this real time now with MiCAR, right? where some national authorities are more progressive and more foul faster than some of the others. So even though passporting is there, it's not truly applicable. So I think in in Asia you do see different approaches. You will see a mix of this. but I do feel it's gonna be a lot more open from an

transaction perspective, the the holding limits, et cetera, because they're not seeing the CBDC as a competition, right? They're seeing it as integration with having its own use cases, as we see with say UPI in India, right? UPI competes with RTGS, as also NEFT in general, right? now coming to the cost, all retail peer-to-peer payments when it comes to faster payments in Asia are cost free.

I stand to be corrected from my knowledge. Most, if not all, are cost-free. There is conversations where merchant payments will come in. there may be a few small charge in like in India, they're looking to apply, but that's after what 10 years since UPI has come in. The government was subsidizing that for building the habit and adoption. And that could be the same thing with CBDCs, where you will take the banks will take some of that cost. And it is the payments, honestly, payments is when you try to make money out of payments, you

Don't necessarily succeed very well in the implementation of that use case, right? People will switch. The moment even in digital payments you start introducing 1%, 2% charges, people start reverting back to cash. It feels like it's a small amount, but people start reverting to cash. So then you do need to be sensitive to that and you've got to look at use cases that build as a cross-selling, lending becomes a classical natural extension to things. Like so if if C in China is contemplating offering yield, that starts becoming more attractive, right? As a center.

As a bank, you may not make money on the transaction, but you start making money from the yield that the government is providing on the deposit, right? So that I feel is gonna be probably the way forward. I don't expect significant fees, if any, on the CBDCs, at least for the next two to five, two to three years, while they all contemplate whether this works for retail, right? And if it's a government programmable payment, you obviously would not have fees attached to that, I would imagine.

Javier 40:50

Has any authority established a target on the level of usage of the CBDC? mean, are they aiming

Syed Musheer Ahmed 40:58

Mm.

Javier 41:00

to have a certain amount of transactions on which they can say it has been a success or it has been a failure or if there are no targets so that nobody will ever know whether it was a failure or success?

Syed Musheer Ahmed 41:16

It's a very good question. I think largely these have not been very explicit targets. because I would imagine setting explicit mon quantitative targets is gonna be hard to achieve, or it's not yet at a stage where you can concretely reach those targets, right? there is a lot of trial and error still in this process because you're dealing with two things. In a lot of these countries, you're dealing with digitize digitalization itself, right? Of payments.

in many, even in India, you have 700 million people who have access to internet. That leaves another 700 million without direct access to internet. Maybe somebody in the family has it, but they themselves don't have it. We have a population of equivalent to mainland China, right? So you still have that issue. So I don't think they are gonna set these targets. and there's one use case. I mean, I know we are we are coming to time, but which is also important is the offline CBDC conversation, which both mainland China and India have spoken about, given

The vast size of the countries and the remote areas, mountainous areas, deserts, forest areas where, you know, like we've seen this with my sitting in the center of Bangalore with a strong internet connection. I've not been able to be that fluid in in in joining this podcast, but internet can be patchy and there may not be connectivity. So the offline CBDC as also offline digital payments is start real-time payments is becoming a major focus. And CBDC is seen as one of those ways where

You have the tokens, it's on one wallet. If it gets transferred to another CBDC wallet, you know, one then you do get online, then it gets settled, but you do have some certainty where people can pay using these offline CBDC wallets.

Michael Salmony 42:54

Okay, I think I'm afraid our time is roughly over. So thank you very much, Musheer. I mean, there are some really interesting topics you raised. I mean, like this programmability in, I can imagine that sort of using food stamps and agricultural subsidies only for that purpose is a real use case in emerging economies. that, and also why Hong Kong and others are doing tokenized money for the

assets for the DvP and those use cases and the bridging of these things. I think there's a lot of food for thought in there. So thank you very much for sharing your insights. That's been fascinating and maybe we'll see you again on Tokenized Carbon Credits.

Syed Musheer Ahmed 43:38

me. Been a pleasure. Thank you.