AN interesting development took place early this week when the Ministry of Communications and Multimedia said that it has proposed that digital currencies such as cryptocurrency be adopted as legal tender to help the younger generation who are active users of the currency, especially on non-fungible tokens (NFTs) trading platforms.

       The statement made by the minister is still very much an open statement as there need to be clear guidelines when it comes to digital currencies.

       As it is, if one refers to cryptocurrencies, like bitcoin, and those used to transact NFTs, like ethereum, those are off-limits as far as Bank Negara is concerned as these cryptocurrencies are not legal tender.

       Nevertheless, globally as we know, different countries have taken a different route when it comes to their stance on cryptocurrencies. For example, bitcoin is a legal tender in certain countries, some countries allow the usage of it, while others have completely banned bitcoin.

       The United States and the European Union (EU) have clear guidelines when it comes to cryptos. According to the US Treasury, bitcoin is “a convertible currency with an equivalent value in real currency or one that can act as a substitute for real currency” (Source: Financial Crimes Enforcement Network).

       For the EU, it recognises bitcoin and other cryptocurrencies as crypto-assets. It is not illegal to use bitcoin within the EU, however, the European Banking Authority, the currency regulatory authority in the union, has stated that crypto-asset activities are outside of its control and continues to warn the public and businesses of the risks of cryptocurrency (Source: European Commission “Proposal for a Regulation of the European Parliament and the Council on Markets in crypto-assets, and Amending Directive (EU) 2019/1937”).

       Globally, El Salvador is the only country that has accepted bitcoin as legal tender while Japan allows bitcoin and cryptocurrencies to be used in transactions and has developed a regulatory framework towards the usage and at the same time is treated as a “legal property”. Some countries have outrightly banned the usage of bitcoin and this includes China. Thailand too issued a statement this week that it will bar the use of cryptocurrencies as it sees them as a threat to the nation’s financial system. The Bank of Thailand does see Central Bank Digital Currency (CBDC) as more effective in achieving financial inclusion without compromising the stability of the country’s financial system. India, on the other hand, although the central bank is in favour of a ban on cryptos, the government seems to be more receptive and intends to introduce a regulatory framework.

       What are digital currencies?

       Digital currencies must be clearly defined and there are many forms of digital currencies. The first is of course what is referred to as CBDC and similar to what the Reserve Bank of India or the People’s Bank of China is fully in support.

       Then there are also digital currencies that are backed by a fundamental asset or other currencies. For example, the usage of Touch ’n Go e-wallet or GrabPay is based on the stored value that is being saved in the individual’s account. Some cryptocurrencies are backed by a fiat currency like the US dollars. This includes cryptos like tether, dai or USD coin, or binance USD.

       The last form of digital currency is those that are not backed by any assets are privately issued – effectively anyone can issue these digital currencies with a proper white paper. Examples include bitcoin, ethereum, litecoin, cardano, and even dogecoin. After all, as anyone can issue these cryptos, it is of no surprise that there are now more than 12,000 cryptocurrencies as anyone with some bright idea with a catchy name can issue a cryptocurrency.

       At one time, the speculative mania around cryptos went berserk with the global market capitalisation of all cryptocurrencies surged to almost US$3 trillion (RM12.67 trillion), more than eight-fold the size of the Malaysian economy in 2021 in nominal terms, but has since dropped a third in value to US$2 trillion (RM8.44 trillion). While digital currency is the way forward, in what form it is adopted is crucial to ensure the level of confidence in the currency remains.

       Better Than Cash Alliance

       According to its website, https://www.betterthancash.org/about, BTCA is based at the United Nations and is a partnership of governments, companies, and international organisations that accelerates the transition from cash to responsible digital payments to help achieve the Sustainable Development Goals. The website further adds that It has almost 80 members that are committed to digitising payments to boost efficiency, transparency, financial inclusion, and helping build economies that are digital and inclusive.

       According to BTCA, members do not want to abolish physical cash – it is legal tender – but rather want to provide responsible digital payment options that are “better than cash”.

       In other words, BTCA does not intend to abolish the current form of how physical cash is widely used but rather provides an option. BTCA presently has some 32 governments as members and they include countries like Jordan, Nepal, India, Indonesia, Kenya, Peru, Senegal, the Philippines, and Vietnam.

       Among international organisations, the members include the International Labour Organisation and Clinton Global Incentive while major corporations in support of the programme include companies like H&M, Coca-Cola, Gap, Unilever and Marks & Spencer. Major resource partners include Bill & Melinda Gates Foundation, Visa, and United Nations Capital Development Fund.

       As can be seen from the above list, BTCA boosts some credible names out there and there is a definite global movement that is slowly but surely changing how transactions are carried out globally via various payment networks and to replace physical cash, eventually.

       Digital currency has its space

       As technology has evolved over time and so has the behavioural pattern of users change due to events that have superseded us, as the pandemic has over the past two years, consumers are now in a better position to accept digital currencies and not just hard paper currencies as means of exchange.

       As more and more nations adopt digital currencies, Malaysia too must move towards that direction as that is how the future is perceived by consumers.

       Nevertheless, the important question is not whether we are moving towards digital currency but in what form is this going to take place.

       As mentioned earlier, there are many ways digital currencies are presently being described and for a digital currency to pass the test of a central bank, it has to be backed by assets or a CBDC. That’s the way forward and if we want to explore something that is of substance in the form of a cryptocurrency, the logical move will be towards a stablecoin where the value is backed by the ringgit. Hence, the proposal to adopt digital currencies like cryptocurrencies as mentioned by the minister will need further detailing as Bank Negara is unlikely to be in support of cryptocurrencies that are not backed by a fiat currency.

       After all, according to the Deputy Finance Minister I, cryptocurrencies such as bitcoin are not suitable for use as payment instruments due to various obstacles, including price fluctuations, exposure to cyber threats, lack of scalability, and negative impact on the environment. Hence, such currencies are not recognised as legal tenders in Malaysia.

       Furthermore, the statement from Bank Negara early this week that together with the Bank of International Settlements, Reserve Bank of Australia, Monetary Authority of Singapore, and South African Reserve Bank, have developed prototypes for a common platform that enables international settlements using multiple CBDC shows that global central banks are receptive on the idea of using digital currency.

       Race for Malaysia’s five digital banks

       Next week, Bank Negara is set to announce the five winners of the digital bank licence that the central bank is issuing from a list of 29 candidates that had submitted their proposals. Who among the 29 bidders that had submitted their bids will qualify remains a mystery for now but the task ahead to roll out the digital bank incentive will be challenging. At the same time, Malaysians too need to be ready for the technological changes that are happening around us and embrace them with confidence, after all, digital is the way forward.

       Pankaj C Kumar is a long-time investment analyst. The views expressed here are the writer’s own.