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The Edge: BNM remains ‘very open’ to innovation amid digital finance shift, says assistant governor

KUALA LUMPUR (Jan 24): In the midst of a fast-changing digital finance landscape and as more new products enter the global finance market, Bank Negara Malaysia (BNM) is taking the view to remain open to innovation.

“We’re very open to innovation and I think that’s our starting point. We would view these developments and try to see if they can offer us something new to enhance our system,” BNM’s Assistant Governor Adnan Zaylani Mohamad Zahid told The Edge in an exclusive interview.

When asked if this could involve the central bank digital currency (CBDC) it has been exploring, Adnan said: “While we don’t have any plans to issue a CBDC now, I think we are open to what benefits it can bring for us. 

“We are working internationally with a few other central banks in Project Dunbar to look at how we can [utilise] a shared platform to conduct cross-border payments.

“We are looking first at cross-border payments, then we could look at wholesale payments within the country and maybe even eventually coming to retail payments.

“However, we have to bear in mind that we have quite an efficient payment infrastructure already. We don’t yet know whether a CBDC could ultimately serve our purposes better but we hope to unfold this through the multi-year CBDC exploration,” he shared.

Last September, BNM announced its participation in Project Dunbar, a project exploring the application of CBDCs, along with the Monetary Authority of Singapore, Reserve Bank of Australia and South African Reserve Bank.

Led by the Bank for International Settlements Innovation Hub, the four central banks looked into the possibility of issuing their CBDCs on a shared platform based on using distributed ledger technology (DLT), or more popularly known as blockchain.

The platform is structured in such a way that it allows each country to have a level of autonomy over its own CBDC, which Adnan said is important, as these digital assets are denominated in ringgit and other jurisdictions’ currencies.

The central banks are joined by partners from the private sector, namely enterprise DLT services provider R3, as well as Partior — a joint venture between Singapore’s Temasek, DBS Bank, and JP Morgan.

There are potentially some benefits to CBDCs, but it’s very difficult to see it at this stage as something that can replace the currency payment system, pointed out Adnan.

“Rather, it could complement the system.

“Having said that, there are certainly some clear benefits when it comes to cross-border payments, given the amount of time taken and the costs that are involved, so a CBDC may be able to yield some immediate benefits,” he added.

BNM’s interest in the segment was piqued after taking note of the experiences of other countries in relation to cryptocurrencies and CBDCs, with Adnan noting that certain countries have adopted cryptocurrencies as part of their domestic system.

These countries include Nigeria and Ecuador, which have opted to create their own CBDC, and El Salvador, the first country in the world to adopt Bitcoin as legal tender.

While some countries have made bold moves, Adnan said BNM is seeking to better understand the actual potential of CBDCs.

He added it is very exploratory in nature and that the central bank has yet to see any clear benefits — a factor behind the bank’s announcement last December that it does not have any immediate plan to issue a CBDC.

A final report on the findings of Project Dunbar is slated to be issued sometime in March 2022, with Adnan hinting that the findings could help in shaping the future of cross-border payments.

Besides the CBDC space, BNM has also been observing the developments in decentralised finance (DeFi), another offshoot of the cryptocurrency segment.

“For DeFi, when we look at the system we currently have in terms of payments, it currently already serves our purposes with a high level of security. While we don’t see any major value add [from DeFi] at this stage, we will continue to observe developments in this space,” Adnan said. 

DeFi protocols provide digital asset-derivative financial services including peer-to-peer lending, borrowing, and trading of cryptocurrencies, without going through banks, financial institutions and regulators.

Proponents of DeFi would typically cite the low fees involved and its accessibility as advantages that these platforms have over the traditional banking system, given that there are no intermediaries involved (besides the actual DeFi platform) and that anyone can access these services through an internet connection.

Typically, borrowers are required to put down a collateral — usually digital assets — which determines the amount that can be borrowed, which is also denominated in cryptocurrencies. The collateral is locked in a smart contract, and in the event that the borrower fails to service their loan, the collateral will be automatically forfeited.

As with other segments in the cryptocurrency and digital assets space, DeFi also faces cyber security risks such as hacks, with a report by blockchain security firm CertiK highlighting that a total of US$1.3 billion (RM5.44 billion) was lost in DeFi hacks in 2021, a 160% year-on-year increase.

Adnan does not yet see a cause for concern amid the rise of these technologies.

“We are not against any of these technologies, but we have to see how these would lead to products and services that we typically regulate or need to regulate. If there are no regulations — if it is something completely new, then we would probably include it in the [Fintech Regulatory Sandbox],” he added.

In the interview, Adnan also noted that BNM is shifting from regulator-led to a more market-driven development model and the latest Financial Sector Blueprint 2022-2026 (FSBP) will reflect that.

“Market mechanisms will be strengthened… We are looking at this next phase of financial sector development to shift from regulatory-driven to market-driven. That’s where we are looking for the financial industry — to step up in terms of taking the initiative to push development forward,” Adnan added. 

The much-anticipated FSBP charting the way forward for the financial sector in the midst of a global pandemic was launched this morning by Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz at the MyFintech Week 2022 (MyFW).

Themed “Advancing Digitalisation for Recovery, Sustainability, Inclusion”, MyFW is anchored on seven priorities: sustainability, resiliency, new realities for finance, economy, financial health and inclusion, start-ups, and regulations. 

The event will feature more than 100 speakers including Tengku Zafrul, BNM Governor Tan Sri Nor Shamsiah Mohd Yunus, United Nations Development Programme administrator Achim Steiner, The Financial Times’ chair of editorial board and editor-at-large (US) Gillian Tett, and Google chief analytics evangelist Kevin Hartman. 

Source:The edge market

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