The elusive digital ASEAN: Why a unified CBDC remains a distant ideal (Part 2 of 4)

I. The balance: How ASEAN CBDC can level the playing field

ASEAN's stark economic differences are more than just a problem; they are the reason why an interoperable CBDC framework is so important. A system like this presents a special chance to improve financial equity by enabling wealthier ASEAN members to better assist poorer ones while also encouraging development in underprivileged regions.

1. Direct and Transparent Aid and Development Finance

• From richer to poorer: Within ASEAN, nations with strong economies and advanced financial systems, such as Singapore and Brunei, are frequently sources of international investment, aid, and technical support. Bypassing layers of middlemen, a regional CBDC platform would enable these donor countries to send money straight to designated projects or recipients in less developed members like Laos, Cambodia, or Myanmar. Less administrative burden and more certainty that money is being spent for its intended purpose result from this increased directness.

• Accountability in action: Distributed Ledger Technology (DLT)-enabled CBDC transactions' intrinsic traceability offers unmatched accountability. Smart contracts might be "programmed" to use funds from a Singaporean development fund, for example, for rural electrification in Vietnam. Payments can be contingent on certain milestones, such as the installation of solar panels or the connection of a specific number of homes. This significantly lowers the possibility of leakage or abuse, which is a frequent worry in conventional aid flows. Higher impact confidence is a benefit for donors, while faster access to cash upon performance is a benefit for beneficiaries.

2. Empowering the underserved and boosting grassroots economies

• Financial inclusion as a priority: In 2014, over 264 million adults in Southeast Asia were "unbanked," with rates of financial exclusion being greater among the impoverished and those living in rural regions, according to the World Bank. Even while these numbers have increased, there are still large disparities. This gap can be filled by an ASEAN CBDC that is interoperable. For example, a paper on the benefits of CBDC from the Central Bank of Thailand (BOT) specifically mentions that it might "increase the opportunity for the business sectors and general public to gain access to financial services with ease, modern, and with more variety."

• Lowering remittance costs: Remittances from its nationals who work in wealthier ASEAN member states provide a vital lifeline for many of the region's poorer countries. Sending $200 abroad can still be quite expensive on average. Instantaneous, almost cost-free cross-border transfers could be made possible by an ASEAN CBDC. Families in underprivileged areas directly benefit from this by having more money available for local business, healthcare, and education. This promotes greater financial stability at the family level by empowering people and lowering their dependency on expensive, unofficial money transfer routes.

• MSME access to regional markets: The foundation of many ASEAN economies, especially in emerging nations, is made up of Micro, Small, and Medium-Sized Enterprises (MSMEs). When they engage in cross-border trade, they frequently encounter exorbitant expenses and complications. For these companies, an ASEAN CBDC would greatly reduce processing costs and expedite payments, making it easier for them to access regional supply chains and markets. This promotes economic diversity and opens up fresh growth prospects in sectors that big finance has hitherto neglected.

3. Enhancing investment climate and investability

• De-risking green iInvestments: A significant portion of the enormous investment needed for the global push towards sustainability must go to developing countries. Here, CBDCs' "programmable money" characteristic is an effective instrument. An ASEAN CBDC can be used by wealthier countries and their impact investors who are interested in ESG-compliant projects to make sure that funding for a waste-to-energy plant in the Philippines or a new sustainable agriculture enterprise in Vietnam is linked to certain, verifiable environmental or social objectives. The sustainability pivot of poorer ASEAN countries is accelerated by the increased transparency and less risk of "greenwashing" that attract green investments.

• Improved capital allocation: An ASEAN CBDC promotes more effective use of financial resources by lowering the cost and difficulty of transferring capital across borders. As a result, investment can more easily go where it is most needed and have the biggest impact, instead of being limited by old systems' inefficiencies. By making it simpler for them to draw in portfolio flows and foreign direct investment, which can spur economic growth, this helps less developed countries.

II. Why the need for control and illusive ideals of "Sovereignty" prevent realization

Despite these clear and compelling benefits that highlight a positive potential balance between rich and poor ASEAN members, the full operationalization of a truly integrated ASEAN CBDC system remains exceptionally difficult. The core issue lies in the deep-seated need for national control and what can be viewed as the illusory ideals of "sovereignty" when confronting the realities of an interconnected global economy.

1. Monetary policy sacrosanct: Monetary policy is seen by central banks as the pinnacle of national sovereignty. Economic stability and national self-determination are thought to be largely dependent on the ability to autonomously set interest rates, regulate currency fluctuations, and govern the money supply. This autonomy is seen as being directly threatened by any move towards a single currency or a highly integrated payment system. A fully unified digital currency would imply a single, harmonised monetary policy, which is both politically and economically untenable in an economically varied area like ASEAN with disparate inflation targets, growth models, and external vulnerabilities. A certain amount of established norms and regulations are necessary for even an interoperable system, which may be seen as a ceding of authority.

As evidenced by IMF research that show central banks evaluating CBDCs based on country-specific objectives, each country wants to make sure that its CBDC fulfils its own unique national interests first and foremost.

2. Fragmented regulatory landscapes and enforcement: In addition to monetary policy, ASEAN has very different regulatory frameworks for digital assets, finance, and data protection. For example, Singapore has a very advanced regulatory framework for DLT and digital payments, but other countries are still in the early phases of creating thorough frameworks. Harmonising these laws would be necessary for the "ideal" ASEAN CBDC in order to guarantee uniform AML/CFT enforcement, data security, and consumer protections across national boundaries. The desire of individual countries to customise legislation to their particular domestic contexts and political sensitivities, however, is at odds with the amount of legislative coordination and conformity required to achieve this harmonisation.

According to an ASEAN+3 report, traditional institutions worried about compliance and reputational risks have already curtailed engagement in blockchain-related firms due to the lack of standardised standards and legislation.

3. Data sovereignty and privacy concerns: There are serious data privacy and sovereignty issues with the traceability that makes CBDCs useful for targeted aid and AML. Who is the owner of the data produced by international CBDC transactions? Which jurisdiction has laws pertaining to data protection? Agreeing on common data governance regulations, storage locations, and access methods across numerous sovereign states is an extremely difficult task, and countries are becoming more and more protective of the data of their citizens. One effective deterrent is the threat of outside access to or control over private national financial information.

4. Uneven technological readiness and infrastructure investment: Even though Singapore and Malaysia have highly developed digital infrastructure, certain "weaker" ASEAN countries still have issues with widespread smartphone use, dependable electricity, and basic internet access, especially in rural regions. It takes a strong underlying digital infrastructure to implement a CBDC. Wealthier countries may be prepared to make investments, but there are significant operational challenges and expenses involved in combining varying degrees of technology readiness into a cohesive system. Less developed countries frequently worry about who will foot the bill for the required upgrades and whether they will fall behind if they are unable to keep up with the latest technological advancements. Addressing obstacles such as "low digital and financial literacy, poor infrastructure, and regulatory gaps" is crucial for CBDC adoption, as the UNDP emphasises.

5. Risk aversion and liability: By their very nature, central banks are risk-averse organisations. There are serious operational, cybersecurity, and financial stability risks associated with launching a brand-new, unproven cross-border digital currency system. In the event of a cyberattack, system failure, or significant technical issue that impacts transactions in several nations, who is responsible? It is extremely challenging to establish shared risk frameworks and clear lines of duty across ten sovereign entities with different levels of risk absorption capacity. An report by Oliver Wyman notes that the "cost associated with developing and operating CBDC includes labour, infrastructure, software, cyber security, and support costs," making it a "arduous task" that central banks need to carefully consider.

III. Conclusion: The pragmatic pursuit of progress

The idea of an ASEAN CBDC as a potent instrument to close economic gaps and promote sustainable development is appealing and, in fact, desperately required. Unquestionably, it has the ability to boost deal flow, fortify AML, lower cross-border expenses, and greatly enhance the investment climate, especially for marginalised areas. However, the strong barriers of national monetary sovereignty, disparate regulatory philosophies, technological differences, and the difficulty of intergovernmental coordination effectively obstruct the way to a truly unified, Euro-like "ASEAN CBDC."

Rather, a more nuanced strategy is needed to go forward, which includes creating multi-currency wholesale CBDC platforms for interbank settlement and encouraging interoperability between individual national CBDCs. By creating bilateral and international connections between national fast payment systems, programs such as ASEAN's Regional Payment Connectivity (RPC) are already establishing the foundation. By establishing effective digital pathways for the transfer of current national currencies rather than establishing a new common currency, DLT and CBDC principles can strengthen these initiatives.

By concentrating on these attainable types of collaboration, ASEAN can respect the essential requirement for national control while using the transformative potential of CBDCs to advance financial inclusion, encourage sustainable investment, and create a more robust financial environment. Even while the "ideal" of a single regional currency is still a long way off—possibly even unattainable—it is an acknowledgement that advancements in digital finance may be achieved through cooperation and shared standards. Instead of a forced conformity that threatens the very sovereignty that governments are trying to preserve, the objective should be a digital ASEAN where financial access and efficiency are "levelled up" for everyone.

- End of Part 2 of 4 -

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