cross-border transactions.

ADB Launches Blockchain Project for Cross-Border Securities Transactions in APAC

To make cross-border securities transactions more secure and efficient in Asia and the Pacific region, the Asian Development Bank (ADB) is going a notch higher by deploying a blockchain-powered project to connect securities depositories and central banks.

Per the announcement:

“Working with leading blockchain companies, ADB will seek to develop ways to directly connect central banks and securities depositories in the ASEAN+3 region within a Blockchain network.”

Therefore, the project will cover South Korea, China, Japan, and the Association of Southeast Asian Nations (ASEAN).

The time constraint is expected to be eliminated because institutions will be directly connected using a blockchain network. Moreover, this approach will minimize settlement risks and transaction costs.

Currently, cross-border transactions in the region take at least two days because they have to be processed through global centres in Europe or the U.S. Furthermore, time differences and varying operating hours have emerged as significant stumbling blocks.

To test the viability of central bank digital currencies (CBDCs) in the region and the project’s interoperability, ADB is partnering with other players like Soramitsu, R3, Fujitsu, and ConsenSys.

ADB disclosed that the blockchain project would be rolled out in 2 phases, with the designing phase expected to be finished by the end of March, whereas the prototyping phase is scheduled for Q2 2022.

The institution also sees this initiative as a milestone towards a sustainable, resilient, inclusive, and prosperous Asia and the Pacific.

In September 2021, the Bank for International Settlements (BIS) joined forces with the central banks of South Africa, Malaysia, Singapore, and Australia to kick start a project aimed at testing the use of CBDCs in cross-border payments to eliminate intermediaries.

A month later, the Financial Stability Board (FSB), a G20-backed think tank, cited the duo of government-issued CBDCs and stablecoins as crucial drivers in pursuing a better cross-border payment system.

The Reserve Bank of India is Expanding CBDC While Dismissing Privately Issued Stablecoins

The Reserve Bank of India (RBI) is planning to increase the number of Central Bank Digital Currency (CBDC) transactions to one million per day by the end of 2023, according to Deputy Governor T Rabi Sankar. This ambitious target comes as the RBI currently records around 5,000-10,000 transactions daily with its retail CBDC, the e₹-R.

CBDCs are a type of digital or virtual currency that is issued and regulated by a country’s central bank. They represent a digital form of a country’s fiat currency and are backed by the monetary reserves of that country. CBDCs are designed to operate and function like traditional money but in a digital form, which can be used for everyday transactions, cross-border payments, and other financial operations.

The RBI’s strategy to boost CBDC usage includes leveraging the Unified Payments Interface (UPI) network. “There will be one QR code, and you can swipe the QR code using the CBDC app. If the merchant has a CBDC account, the payment will settle in the CBDC wallet. If the merchant does not have a CBDC account, then there will be an option to make payment using UPI,” Sankar explained.

Currently, 1.3 million customers and 0.3 million merchants are using the retail digital Rupee, with 13 banks offering retail CBDC. These banks have partially rolled out interoperability, allowing the QR code to be scanned using the CBDC app. Full interoperability for CBDC customers using UPI for payments is expected by the end of the month. The RBI also plans to onboard the remaining 20-25 banks to offer interoperability to CBDC customers, although this may take more time.

Sankar also highlighted the potential of CBDCs in reducing costs for cross-border transactions, which currently stand at a high 6% for small value transactions according to World Bank estimates.

In contrast to Sankar’s positive attitude toward CBDC, he warned that stablecoins pose an existential threat to policy sovereignty, particularly for countries like India. Stablecoins linked to underlying currencies, while beneficial to certain economies, could lead to the risk of dollarisation and transfer of seigniorage to private issuers, replacing the use of the rupee in the economy.

Stablecoins are a type of cryptocurrency that are designed to maintain a stable value relative to a specific asset or a pool of assets. Stablecoins can be pegged to a currency. They are often used to provide stability in the highly volatile crypto markets. Examples of these include Tether (USDT) and USD Coin (USDC), which are not issued by a central bank or government, but by private companies, thus weakening the authorities’ control over it.

Sankar suggested that a stable solution would be for every country to have its own CBDC, with a mechanism for these CBDCs to interface and transact with each other.

The RBI is also considering the anonymity aspect of CBDCs, a defining feature of the currency. However, Sankar emphasized that any decisions regarding anonymity must be legally backed and consistent with the Prevention of Money Laundering Act (PMLA).

China Dismantles $2.2 Billion Underground Banking Operation Leveraging Cryptocurrencies

Chinese authorities have recently dismantled a massive underground banking network valued at $2.2 billion, which was ingeniously using foreign digital currency platforms to circumvent the country’s stringent financial controls. This operation came to light following a detailed investigation by Chinese foreign exchange police.

The underground banking system operated by purchasing virtual currencies and then selling them through overseas trading platforms, thereby obtaining the necessary foreign currency. This process effectively bypassed China’s tight foreign exchange regulations. The inspector of the Qingdao Branch of the State Administration of Foreign Exchange, Xu Xiao, highlighted that this process involved illegal foreign exchange transactions, mainly converting yuan to other currencies.

During the crackdown, authorities seized cryptocurrencies worth approximately $28,000, including Tether and Litecoin, among others. However, it’s believed that the operation moved over $2.2 billion through more than a thousand bank accounts across 17 provinces and municipalities. This extensive network exemplifies the sophisticated and far-reaching nature of the illegal operation.

China’s strict regulations permit individuals to exchange only up to $50,000 in foreign currency annually unless officially authorized. Transactions beyond this limit without a permit are considered money laundering. This policy reflects China’s efforts to maintain a “closed” capital account, preventing capital flight.

China, once a significant player in the cryptocurrency market, imposed a blanket ban on crypto exchanges in 2017 and later expanded restrictions to mining and trading. Despite these prohibitions, underground operations continued, as evidenced by this recent bust. The Chinese government asserts that its strict stance on cryptocurrencies is to prevent illegal financial activities.

Interestingly, while mainland China maintains a hostile stance towards cryptocurrencies, the special administrative region of Hong Kong is more progressive, implementing specific rules and licensing crypto exchanges. This discrepancy highlights the varied approaches to cryptocurrency regulation within and outside China.