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

KUALA LUMPUR (January 24): Amid a rapidly changing digital financial landscape and as new products enter the global financial market, Bank Negara Malaysia (BNM) wants to remain open to innovation.

“We are very open to innovation and I think that is our starting point. We would look at these developments and try to see if they can offer us something new to improve our system,” BNM Deputy Governor Adnan Zaylani Mohamad Zahid said. The edge in an exclusive interview.

When asked if this could involve the Central Bank Digital Currency (CBDC) which he has explored, Adnan said, “While we have no plans to issue a CBDC now, I think that we are open to the benefits it can bring to us.

“We are working internationally with a few other central banks under the Dunbar project to see how we can [utilise] a shared platform for making cross-border payments.

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

“However, we must bear in mind that we already have a fairly efficient payment infrastructure. We don’t yet know if a CBDC might ultimately serve our purposes better, but we hope to roll this out through the multi-year exploration of CBDCs,” he shared.

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

Led by the Bank for International Settlements Innovation Center, the four central banks explored the possibility of issuing their CBDCs on a shared platform based on the use of distributed ledger technology (DLT), or more commonly referred to as blockchain.

The platform is structured to allow each country to have a level of autonomy over its own CBDC, which Adnan says is important since these digital assets are denominated in ringgit and other currencies. jurisdictions.

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

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

“On the contrary, it could complete the system.

“Having said that, there are certainly clear advantages when it comes to cross-border payments, given the time required and the costs involved, so a CBDC may be able to generate immediate benefits,” he said. he adds.

BNM’s interest in the segment was piqued after noting other countries’ experiences with cryptocurrencies and CBDCs, with Adnan noting that some countries have adopted cryptocurrencies as part of their national system.

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

While some countries have taken bold steps, Adnan said BNM is looking to better understand the true potential of CBDCs.

He added that it is very exploratory in nature and the central bank has yet to see clear benefits – a factor behind the bank’s announcement last December that it had no immediate plan to issue a CBDC.

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

Besides the CBDC space, BNM has also been watching developments in decentralized 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. Even if we do not see any major added value [from DeFi] at this point, we will continue to observe developments in this space,” Adnan said.

DeFi protocols provide financial services derived from digital assets, including peer-to-peer cryptocurrency lending, borrowing, and trading, bypassing banks, financial institutions, and regulators.

Proponents of DeFi would generally cite the low fees involved and its accessibility as advantages of these platforms over the traditional banking system, given that there are no intermediaries involved (apart from the current DeFi platform ) and that anyone can access these services through an Internet connection. .

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

As with other segments of the cryptocurrency and digital asset space, DeFi also faces cybersecurity risks such as hacks, with a report from blockchain security firm CertiK highlighting that a total of 1 US$.3 billion (RM5.44 billion) was lost in DeFi hacks in 2021, a 160% year-on-year increase.

Adnan still sees no reason to worry about the rise of these technologies.

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

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

“Market mechanisms will be strengthened… We envision this next phase of financial sector development to move from a regulatory to a market-based approach. This is where we are looking for the financial sector – to take the lead in driving development forward,” Adnan added.

The highly anticipated FSBP which charts the way forward for the financial sector amidst a global pandemic was launched this morning by Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz during MyFintech Week 2022 (MyFW).

theme “Advancing digitalization for recovery, sustainability and inclusion”, MyFW is anchored on seven priorities: sustainability, resilience, new realities for finance, economy, financial health and inclusion, start-ups and regulations.

The event will feature over 100 speakers including Tengku Zafrul, BNM Governor Tan Sri Nor Shamsiah Mohd Yunus, United Nations Development Program Administrator Achim Steiner, The Financial TimesEditorial Board Chair and Editor-in-Chief (US) Gillian Tett, and Kevin Hartman, Google Analytics Chief Evangelist.

Read also:
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