Japan’s global technology company, Soramitsu, is on a quest to improve financial inclusivity by building an Asian cross-border payments network. The new infrastructure will enable Small and Medium Sized Enterprises (SMEs) in the country to connect and trade with businesses and individuals in Southeast Asia. The company will use the Central Bank Digital Currencies (CBDCs) and stablecoins—cryptocurrencies tied to fiat money like the US dollar.

CBDCs are digital currencies issued by a nation’s central bank and have an equivalent value to the country’s fiat currency. By virtue of being tied to the treasury, CBDCs offer a more stable alternative than often volatile cryptocurrencies. Soramitsu already has a history of supporting CBDCs, one in Cambodia, known as Bakong and another in Laos, called Digital Lao Kip. The first step in developing the network will be establishing an exchange for stablecoins to enable countries to convert money into a Yen-dominated crypto coin.

One of the benefits of stablecoins will be low transaction fees since these currencies do not have to go through interbank payment networks. Japan’s Mitsubishi UFJ Trust and Banking and other partners will help build the exchange’s infrastructure. Soramitsu, in collaboration with Tokyo-based digital services company Vivit and the Tama University Center for Rule-making Strategies, will make the cross-border payment network, enabling speedy transaction processing between countries.

Challenges in implementing CBDCs and regional payment systems

According to the World Economic Forum (WEF), digital financial services in Southeast Asia have played a role in keeping the economy afloat, with online payments expected to exceed USD 1 trillion by 2025. However, there needs to be more innovation in internet-based monetary products for SMEs, undermining inclusive growth and economic development for most of the population. Therefore, public-private partnerships are essential in addressing these challenges.

Financial inclusion helps families, expands businesses, facilitates day-to-day living, enables investments in education and health, and improves overall life quality. Currently, 70% of the population is said to be unbanked or underbanked. The regional governments with a higher percentage of unbanked and underbanked citizens are Vietnam at 79%, the Philippines at 78%, and Indonesia at 77%.

While CBDCs may be able to democratise access to funds, they face several challenges:

Regulatory restrictions

Countries in Southeast Asia must work on improving their regulatory climate to ensure CBDCs and stablecoins are in use and safe for the public. Variations of the laws in different nations mean no uniformity in the region, which would boost the growth and implementation of digital currencies.

Infrastructure shortcomings

The Association of Southeast Asian Nations (ASEAN) needs infrastructure development, especially in rural areas, to bridge the technological gap and enable residents to access funds.

Financial illiteracy

Many residents need to learn about CBDCs and other financial-related topics. As such, they tend to avoid innovative solutions they do not understand, even though those novel products would boost the quality of their lives. People are also wary of possible cyberattacks and the loss of their personal data. 

User privacy

There is a risk of governments using CBDCs as a tool for controlling the masses’ activities. Central banks will be able to monitor payment data and even trace the identities of those transacting, raising the possibility of using that information against their citizens.

State of the global economy

The current global economic state is challenging for many, as countries face the possibility of going through a recession and the financial difficulties that would ensue. Governments are focusing on stabilising their economies, meaning innovative tech startups are not receiving adequate funds from investors or political leaders.

Driving financial innovation in Southeast Asia

Cross-border payments and CBDCs can drive monetary innovation and inclusion in ASEAN. According to the World Economic Forum (WEF), retail CBDCs will help the unbanked and underbanked create financial identities. They can eliminate barriers to lending, enable people to build credit, fund microfinance activities, and reduce the cost of transactions. Furthermore, they can deliver interoperability with non-CBDC systems, meaning more trade across borders.

One of the biggest challenges businesses in Southeast Asia deal with is fraud from industry competitors. CBDCs make it easier for governments to track and thwart financial fraud and tax evasion, thereby levelling the playing field for all startups. Moreover, it deters investors from simply looking for companies where they can launder money or counterfeit physical cash.

Governments and businesses have a role to play in achieving net-zero emissions by 2050. CBDCs offer solutions to enable leaders and citizens to pay for carbon credits or deduct the charges automatically. 

However, the costs of transitioning to sustainability will be substantial and may have adverse socioeconomic impacts on communities. An economic transformation in the region and the continued digital transformation will go a long way in lowering energy costs, conserving capital, investing in innovation, delivering financial inclusivity, and more.