Central bank-backed digital currencies (CBDCs) are rapidly on the rise, with 86% of central banks around the world researching the potential of CBDCs, 60% experimenting with the technology and 14% piloting the technology.

CBDC is the digital form of fiat money and differs from existing virtual currencies and cryptocurrencies like Bitcoin in that they are issued by the state and backed by the government.

Bank Negara Malaysia stated today in their newly published annual report that they are “actively building internal capacity to support informed decisions on CBDCs” which includes conducting POCs.

Though they do not have any immediate plans to issue CBDC they will “actively assess the potential value proposition of CBDC”. The central bank said that policy decisions around CBDCs will be guided by whether it is able to demonstrate clear benefits to Malaysia as a whole while ensuring that risks from CBDCs are effectively managed, in particular, the financial stability risks.

They further added that they will evaluate the level of usage of physical cash, usage of cryptocurrencies for payments, and the extent that CBDC is being used to facilitate cross-border trade as key data points to evaluate the merits of CBDC issuance.

The BIS (Bank of International Settlements) identifies two broad types of CBDC based on their levels of accessibility; general purpose and wholesale.

While a wholesale, token-based CBDC is a restricted-access digital token for wholesale settlements (e.g. interbank payments, or securities settlement), a general-purpose CBDC is primarily targeted at retail transactions and resembles a type of “digital cash”.

In Asia, many of Malaysia’s neighbours have already begun conducting experiments on CBDCs, the Monetary Authority of Singapore (MAS) has already completed the final phase of its CBDC trial, Project Ubin.

Up north in Thailand, the country has already reached advanced stages of its wholesale CBDC trials and is looking to focus on retail CBDC next.  Meanwhile, the National Bank of Cambodia has began trials for retail CBDC named Project Bakong.

Bank Negara Malaysia further noted in their report that while CBDC may yield potential benefits such as faster settlement, easier accessibility, and better system resilience, it is not without its risks.

They stressed that it is crucial for central banks to thoughtfully ensure that CBDCs are carefully designed to avoid compromising monetary as well as financial stability and that underlying motivations to issue digital currencies may differ across countries depending on their level of development and specific circumstances.