The elusive digital ASEAN: Why a unified CBDC remains a distant ideal (Part 1 of 4)

The idea of smooth financial flows is alluring in the colourful tapestry of Southeast Asia, where thriving rural economies coexist with busy megacities. Imagine a time in the future when a Thai investor can openly contribute money to a renewable energy project in Cambodia with complete transparency regarding its environmental impact, or when a small craft vendor in Laos can receive payment instantly from a buyer in Singapore. This is what the ASEAN Central Bank Digital Currency (CBDC) promises to be: a smart network of interoperable national digital currencies or a strong wholesale platform, rather than a single, Euro-like currency. Although the path to its implementation is paved with deeply ingrained complications, such a system has enormous potential to "level up" financial access for millions of people.

The unmet promise: Why an ASEAN CBDC is crucially needed

Despite its progress, ASEAN's present financial system is nonetheless disjointed and frequently ineffective, especially when it comes to cross-border transactions. A thoughtfully planned, networked CBDC ecosystem has the potential to drastically alter this terrain:

1. Elevating financial inclusion: Access to formal financial services is still difficult for many residents of ASEAN countries that are less developed. Traditional banking frequently excludes large portions of the population due to minimum balance requirements, physical branches, and copious paperwork. A revolutionary substitute is provided by a nationwide CBDC that is intended for retail access. According to the IMF, "CBDC can be used without a bank account," highlighting its potential to reach the unbanked through feature-phone-accessible digital wallets that have "no minimum balances" and possibly "less stringent identification requirements for small transactions." The impact increases when these national CBDCs are interoperable within ASEAN. For example, a migrant worker in Malaysia can send money to a relative in Myanmar at a speed and cost never before possible, straight into a safe digital wallet. 

As a result, remittances—a lifeline for many—become more effective and affordable, democratising access to capital.

2. Streamlining cross-border costs and efficiency: Despite ASEAN's substantial intraregional commerce and investment, cross-border payments are still infamously costly and delayed, frequently requiring many correspondent banks and currency conversions. The G20 has recognised these inefficiencies and set a 2027 goal to enhance cross-border payments. By facilitating almost instantaneous settlement, an interoperable ASEAN CBDC might drastically reduce these expenses and delays. According to a Deutsche Bundesbank report, CBDC might "act as a catalyst for enhancements in the cross-border payments space. Examples of such improvements would be the use of common message standards along the entire payment chain and faster settlement due to shorter process chains made up of fewer participants."

Increased profitability for businesses, especially Small and Medium-sized Enterprises (SMEs), which today carry an unfair burden of high transaction costs, is a direct result of this friction reduction.

3. Fortifying AML and counter-terrorism financing (CFT) efforts: Compared to cash or less regulated digital assets, the digital nature of CBDCs naturally provides more transparency and traceability. According to a Sanction Scanner report, "transactions can be more transparently tracked because they are digital." "Blockchain technology, which is frequently used in CBDC systems, offers an auditable and unchangeable record of transactions, which makes it simpler to spot shady activity." A CBDC network gives central banks and law enforcement strong new capabilities for real-time transaction surveillance, algorithmic detection of suspicious patterns, and improved data analytics to a region struggling with various forms of illicit funding. This increases trust with foreign partners and fortifies the integrity of the ASEAN financial system, making it less appealing for illegal transfers.

4. Enhancing investment climate and deal flow: An interoperable ASEAN CBDC can stimulate investment beyond payments, especially in sustainable development. Smart contracts enable the revolutionary "programmable money" feature. Only after certain requirements are met can funds be digitally designated and released. Consider a situation in which a Singaporean investment fund with a sustainability focus provides funding for an Indonesian project aimed at preventing deforestation. The money might be set up to only release small amounts when certain carbon sequestration benchmarks are met or when confirmed satellite data shows that there hasn't been any new deforestation in the designated areas. For investors, this significantly lowers the danger of "greenwashing" and offers never-before-seen certainty that funds are being used for their declared sustainable purpose. CBDCs "hold significant value for enhancing financial systems and supporting sustainability goals," according to a PMC paper.

In the worldwide shift to a more inclusive and green economy, CBDCs may be a useful instrument by facilitating more direct and transparent financial flows. This enhanced transparency and trust will inevitably stimulate deal flow, channelling much-needed investment into critical sectors across ASEAN, especially in less developed nations striving for their" sustainability pivot”.

The illusion of control: Why the Ideal is unlikely to materialize soon

Even with the strong benefits, there are substantial, frequently politically sensitive operational obstacles in the way of the complete implementation of an interoperable, fully connected ASEAN CBDC system that functions similarly to a smooth regional payment train. This is mainly due to the deeply rooted urge for national control and a potentially elusive definition of "sovereignty."

1. Monetary policy autonomy and fear of surrender: The biggest obstacle is that individual central banks are reluctant to give up any perceived authority over their country's monetary policy. As with the Eurozone, a single monetary authority or at least significantly unified policies throughout the union would be required for a shared, fully unified digital currency. Given the stark differences in the ten ASEAN member states' national interests, inflation targets, and economic progress, this is a bridge too far. According to Carolyn Wilkins, a former senior deputy governor of the Bank of Canada, "A nation's monetary sovereignty is threatened when a digital currency denominated in a different unit of account is widely adopted domestically."

Although a common currency is not implied by an interoperable system of national CBDCs, even the coordination needed to enable smooth cross-border flows may be seen as an intrusion on domestic decision-making. In order to control domestic economic shocks, each central bank protects its autonomy in using interest rates and exchange rates as policy tools.

2. Diverse regulatory philosophies and pace of development: The countries that make up ASEAN trade bloc have quite different financial regulatory systems and maturities. While other countries are still creating the fundamental laws governing digital finance, Singapore has an advanced regulatory structure. It is a massive task to harmonise legal frameworks for consumer protection, data privacy, and digital asset definitions across ten sovereign states, each with its own legislative priorities and process. The rate of CBDC exploration itself varies greatly; some countries, like Singapore and Thailand, are just starting their study, while others are well into wholesale CBDC pilots (e.g., Project mBridge). Because of this asynchronous development, a planned regional launch is extremely difficult.

3. Technical interoperability: A gordian knot: The technical difficulties are enormous, even in the event of strong political determination. Consider a scenario where ten central banks, each with a different set of protocols, messaging standards, and cybersecurity designs, construct their CBDC on distinct DLT platforms. To smoothly integrate these various systems, "bridges" or common platforms must be created, which calls for extensive standardisation, advanced technological advancement, and ongoing maintenance. The goal of initiatives like BIS's Project Nexus is to create such global standards, however there are several obstacles to overcome in the actual implementation across various national infrastructures, especially those with differing degrees of digital maturity. The AMRO ASIA points out that even with the advancements in RPC, "regulatory and governance hurdles remain, they can be addressed through coordinated efforts that integrate sound policy framework and innovative technology."

4. Cybersecurity and systemic risk: Despite its advantages, a fully connected ASEAN CBDC network would be a single, enormous target for cyberattacks. The "weakest link" in the network might make the entire system vulnerable, which might cause the bloc to experience catastrophic financial instability. It is an operational nightmare to guarantee consistent, strong cybersecurity standards, ongoing threat monitoring, and quick, coordinated incident response among ten independent businesses. Because of its size and delicate nature, central bank digital currency requires an unmatched degree of security and resilience, which makes implementation very difficult.

5. Governance and burden sharing: Who would be in charge of this intricate regional CBDC system? How would expenses be distributed? How would responsibility be divided in the event of mistakes or violations? Although useful for diplomacy, the "ASEAN Way" of consensus-based decision-making can be too slow and awkward for the flexible, real-time requirements of a state-of-the-art financial infrastructure. Negotiations would be ongoing to reach agreements on fair burden-sharing for cybersecurity, maintenance, and development, especially in light of the economic differences.

The path forward: Pragmatism over perfection

The "ideal" of a totally unified, Euro-like ASEAN CBDC is unlikely to come to pass in light of these realities. This does not, however, imply that the advantages it offers will be foregone. Strong wholesale CBDC platforms and improved national CBDC interoperability are the more realistic and attainable route.

A strong model is provided by ASEAN's current Regional Payment Connectivity (RPC) program, which focusses on Local Currency Settlement (LCS) and bilateral and multilateral QR payment links. According to an AMRO ASIA document, "RPC eliminates unnecessary steps, reducing both costs and transaction time, by enabling payments in local currencies." Current partnerships such as Malaysia's DuitNow and Thailand's PromptPay with Singapore's PayNow are observable achievements. The next logical step is to investigate how national CBDCs may use DLT to improve and integrate these current interoperability frameworks, making them even more secure, affordable, and quick.

The potential for a shared platform for interbank settlement employing many CBDCs is demonstrated by wholesale CBDC projects such as Project mBridge, which involves Thailand and Singapore among others. Without directly affecting retail monetary sovereignty, this strategy can solve the exorbitant fees and inefficiencies of correspondent banking for more extensive cross-border transactions.

In the end, gradual, collaborative actions are needed to "level up" the access of ASEAN residents to capital and promote a more secure, sustainable financial sector. The deeply ingrained character of state sovereignty and the basic human desire for control may make the goal of a unified ASEAN CBDC challenging. However, ASEAN can still unlock a significant portion of the transformative potential of the CBDC by emphasising pragmatic interoperability, leveraging existing successful initiatives, and establishing trust through concrete, low-risk pilot projects. This will demonstrate that collective benefits can be achieved even in the absence of a single, common digital currency. 

- End of Part 1 of 4 -

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