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OPINION

 * CBDC - Central Bank Digital Currencies
 * CeFi - Centralized Finance
 * Cryptocurrencies
 * DBS Bank
 * DeFi - Decentralized Finance

Published March 9, 2022 | 9:00 am HKT Last updated 2 days ago
By Piyush Gupta
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HOW WILL DIGITAL MONEY PLAY INTO BANKING’S FUTURE?


BLOCKCHAIN TECHNOLOGY IS RAPIDLY TRANSFORMING THE FINANCE SECTOR. DBS BANK CEO
PIYUSH GUPTA OFFERS AN INSIDER’S LOOK AT WHAT’S COMING NEXT.

Image: Shutterstock

Editor’s note: In December 2020, DBS Bank — the largest bank in Southeast Asia
— became one of the first traditional financial institutions in the world to
offer cryptocurrency trading and custody services. DBS was also behind the
launch of a first-of-its-kind blockchain platform for cross-border settlements.
In an excerpt from DBS’ latest annual report, CEO Piyush Gupta shares his
thoughts on where the digital economy is headed next.

______________________________

Let me parse the question of digital currencies into the following: 

‒‒:‒‒
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Are we likely to see a continued reduction in notes and coins, replaced by bits
and bytes? The answer to this is a clear yes. Digital money is not a new
concept, whether it be through use of credit cards or wire transfers. In fact,
97% of money in circulation is digital. With the ubiquity of the mobile phone,
it is quite clear that e-wallets and electronic transfers will increasingly
proliferate.



Are we likely to see privately-issued digital coins (e.g. Bitcoin) take over the
role of state-backed money? The answer to this is probably no. The reason for
this is that money needs to have three attributes: be a unit of account, a
medium of exchange and a store of value. 

Privately-issued coins find it hard to attain the first two of these. The
reasons for this are several. These include a lack of ubiquity, absence of faith
in the “issuer”, and large volatility in value, among others. While the
technology used to issue these coins (blockchain) is indeed very powerful and
does form a basis for creating immutability and transparency, the truth is that
it will still be a while before the common man will universally accept this when
it comes to regular monetary transactions. I also expect that regulators and
politicians will be loath to give up control of monetary policy and economic
management tools, and will therefore be very circumspect about letting private
money grow. Having said this, I do think that private money (crypto) will
continue to grow as a meaningful store of value, much like gold is today.

Are we likely to see more central bank digital currencies (CBDCs) in that case?
I think this is a possibility, with 85% of central banks in the world currently
studying and/or piloting CBDCs — so the direction of travel seems clear.
However, my suspicion is that the use case for cross-border settlements will be
more compelling than for local settlements. When thinking of local CBDCs,
central banks will wrestle with a critical question: to what extent do they want
to disintermediate the extant banking system, and its role in credit creation?
And if they go down an “intermediated” CBDC approach (i.e. use the existing
banking system for custody of retail CBDC wallets), do they achieve meaningful
improvement over existing banking solutions?

Central banks are evaluating the potential impact of CBDCs on the efficacy of
monetary policy, credit creation and availability, enabling greater financial
inclusion, as well as the safety and stability of the financial system. We
continue to stay close to these developments by participating in industry
sandboxes and experimenting with the technology. 



Beyond digital currencies, another key innovation that blockchain technology has
enabled is Decentralized finance (DeFi), where tokenization and the use of smart
contracts allow peer-to-peer financial transactions without the need for
intermediaries, based on self-governance by the DeFi community. This will result
in a rethink of the nature and construct of existing social and economic
arrangements. I believe this creates several implications, of which three points
stand out in my mind. 

 1. The programmability of smart contracts will allow us to reimagine workflows,
    such as processes pertaining to settlements, anti-money laundering (AML) and
    know your customer (KYC). This could dramatically change the structure of
    back-office operations by reducing costs and boosting overall efficiency and
    effectiveness.
 2. There will be creation of new or modified roles in this alternate financial
    system for existing intermediaries. In this regard, we can draw parallels to
    the creation of the mutual fund industry, which disintermediated commercial
    banking, but led to the evolution of investment banking and wealth
    management. In the same way, I believe there will be an evolution of
    existing roles in the industry. There will also continue to be a role for
    client ownership and management of client experiences for banks.
 3. The intent of DeFi is to democratize finance by replacing centralized
    institutions, including government bodies. In my view, this is unlikely to
    occur. Going down this path will require humanity to confront the
    intractable but important question around the roles of the nation state, and
    its responsibility for the safety and stability of the financial system. My
    belief is that the nation state will still be a critical organizing
    principle and will not be diminished anytime soon. 

We are keeping a firm pulse on these developments, and will continue to explore
ways to harness its benefits and create new opportunities.


AUTHOR PROFILE


PIYUSH GUPTA

Piyush Gupta is the CEO of DBS Group, which has been named "World's Best Bank"
by several publications, including Euromoney and Global Finance. Prior to
joining DBS, Piyush had a 27-year career at Citigroup, where his last position
was CEO for Southeast Asia, Australia and New Zealand. Piyush is also a vice
chairman of the Institute of International Finance and part of the World
Business Council for Sustainable Development's executive committee. In addition,
he is part of the advisory council of the Bretton Woods Committee and the United
Nations Secretary General’s Task Force on Digital Financing of the Sustainable
Development Goals. Piyush has a bachelor of arts (honors) degree in economics
from Delhi University in India and a post-graduate diploma in management from
the Indian Institute of Management in Ahmedabad. In 2019, Harvard Business
Review named Piyush one of the world’s top 100 best-performing chief executives.
In 2020, he was awarded the Public Service Star by the president of Singapore
and named Global Indian of the Year by the Economic Times in 2021.


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THE CURRENT FORKAST

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Get smarter with context and commentary on the week's top blockchain & crypto
trends in Asia.




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