Economics & Strategy

Update on Digital Currencies: December 2020

Currencies/monetary policy/economics/digital/banking/finance

Group Research December 7, 2020

30

Nathan Chow Summary

Strategist/Economist
nathanchow@dbs.com • This is a quarterly update of our flagship report on digital currencies

Ma Tieying
• COVID-19 pandemic has accelerated the global trend towards a
Economist
matieying@dbs.com cashless economy
• Cryptocurrency market experienced very strong growth in 4Q
Samuel Tse • Major Chinese banks have begun testing a digital wallet app
Economist
samueltse@dbs.com linked to the e-RMB
• Numerous supranational institutions are exploring scenarios of
central bank digital currencies and global stable-coin usage

COVID-19 and cashless payments

The COVID-19 pandemic this year has accelerated the global trend
towards a cashless economy. Cash and ATM usage have declined
sharply in many countries, along with the reduction in in-person
purchases of goods and services. The usage of electronic payments
Global cash usage is
instruments has increased notably on the other hand, driven by the
likely to decline 4-5
change in consumers’ behavior. In the 2020 Global Payments Report
ppt this year
published in October, McKinsey projects a 4-5 percentage points decline
in the share of global payment transactions conducted via cash by the
end of 2020, down from the 69% in 2019. Specifically, McKinsey expects
the share of cash payments to drop to 41% in China this year, 89% in
India, 96% in Indonesia, and less than 40% in Singapore and South Korea.

As far as digital transactions (digital commerce and mobile payments)

are concerned, market and consumer data provider Statista has revised
up its forecasts. The world’s total digital payments transaction value is
now projected to reach USD4.9tn this year (previous estimate:
USD4.4tn). China will remain as the most important digital payments
market, comprising nearly half of the worldwide transaction value.

Refer to important disclosures at the end of this report.

Update on Digital Currencies December 7, 2020

Cash usage by country 2010 vs 2020

% of cash used in total transactions by volume
100
2010
80 2020

60

40

20

Sources: McKinsey, DBS

Crypto market update

The global cryptocurrency market experienced very strong growth in

4Q. The market capitalization of Bitcoin expanded by 83% between the
Market cap of beginning of October and the end of November, from USD197bn to
Bitcoin expanded by USD361bn. BTC price also surged by more than 80% during the same
more than 80%, timeframe, surpassing the 2017 peak to hit almost USD20,000 at end-
with price hitting Nov. On vetted exchanges, the daily average trading volume of BTC
new record high reached USD620mn in Oct-Nov, about 80% higher than that in Jul-Sep.
The ongoing surge could be ascribed to industry-specific factors,
including the entry of large companies like PayPal into the crypto space,
and the growing interest in BTC among institutional investors.

Bitcoin: price and trading volume Cryptocurrencies: market cap

USD USD bn USD bn
20,000 6 500
Trading volume (RHS) BTC ETH XRP BCH
Price 5
400
15,000
4
300
10,000 3
200
2
5,000
1 100

0 0 0
2017 2018 2019 2020 2019 2020
Sources: Bloomberg, DBS Sources: Bloomberg, DBS

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Update on Digital Currencies December 7, 2020

From the investment perspective, Bitcoin recorded a massive annual

Bitcoin has started
to outperform both
stocks and gold on
the risk-adjusted
return basis
return of about 150% at end-Nov. The annualized realized volatility of
BTC stayed largely stable during the Oct-Nov period, but the gap with
stocks and gold narrowed as the latter’s volatility increased. As such, on
the risk-adjusted return basis, BTC has also begun to outperform S&P
500 and gold since mid-Nov. In addition, the BTC-S&P 500 and BTC-gold
correlations both remained weak at less than 0.5, but higher than their
long-term averages.

Bitcoin, S&P 500, gold: return Bitcoin, S&P 500, gold: volatility
1Y return, % Annualized volatility of daily returns, %
200 BTC 100
S&P 500
150 80
Gold
100
60
BTC
50
S&P 500
40
0 Gold

20
-50

-100 0
2019 2020 2017 2018 2019 2020
Sources: Bloomberg, DBS Sources: Bloomberg, DBS

Bitcoin, S&P 500, gold: risk-adjusted return Bitcoin, S&P 500, gold: correlation
1Y return/realized volatility 12M correlation of daily returns
4 BTC 0.5 BTC-S&P 500
S&P 500 0.4 BTC-Gold
3 Gold
0.3
2 0.2
1 0.1
0.0
0
-0.1
-1
-0.2
-2 -0.3
2019 2020 2017 2018 2019 2020
Sources: Bloomberg, DBS Sources: Bloomberg, DBS

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Update on Digital Currencies December 7, 2020

Ethereum’s market cap also expanded strongly in the past couple of

months, from USD40bn at the beginning of October to USD69bn at the
Ethereum buoyed
end of November. The price of ETH, the gateway asset to most
by the DeFi craze
Decentralized Finance (DeFi) applications, surged more than 70% during
the same period. This was buoyed by the DeFi craze that emerged this
summer, as well as the launch of the Ethereum 2.0 network.

In the stablecoin space, the fiat-backed Tether has continued to

dominate, despite the rapid growth of programmatic stablecoins on the
back of the DeFi boom. The total supply of Tether (ETH, Omni, Tron
networks) increased by more than 20%, from USD16bn at the beginning
of October to USD20bn at the end of November.

Notably, the participation of large financial institutions and other

companies in the crypto ecosystem has increased. For instance,
Japanese investment bank Nomura launched crypto custodian service in
June, through a joint venture with two cryptocurrency startups. Fidelity
Investments launched its inaugural Bitcoin fund for wealthy investors in
August. Singapore Exchange announced the listing of its first-ever crypto
indices – the iEdge Bitcoin Index and the iEdge Ethereum Index – in
September. More recently, payments giant PayPal announced to enable
its customers to buy, hold and sell cryptocurrencies, including Bitcoin,
Ethereum, Bitcoin Cash and Litecoin, using their PayPal accounts.

In addition, digital asset manager Grayscale Investments reported more

than USD1bn inflows into its trust products in 3Q, setting a record for
the third consecutive quarter. About 84% of inflows came from
institutional investors, mainly hedge funds, in 3Q. On the 12-month
trailing basis, institutional investors contributed 80% of inflows.

CBDC development

In October, the People's Bank of China held a lottery to distribute

RMB10mn worth of its new digital currency to 50,000 people in
Shenzhen. The European Central Bank recently published a
comprehensive report examining the possible exploration and
implementation of a “digital euro.” A report on CBDCs by the Bank for
International Settlement on CBDCs was also recently published in
conjunction with seven central banks.

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Update on Digital Currencies December 7, 2020

Recent CBDC-related developments

November ▪ PayPal announced to launch crypto services for users of its platform globally,
and to explore CBDCs.
▪ The Reserve Bank of Australia announced that it is partnering with
Commonwealth Bank, National Australia Bank, Perpetual and ConsenSys to
explore the potential use and implications of a wholesale form of CBDC.
▪ The HKMA and Band of Thailand will enter the second phase of Project
Inthanon-LionRock, which will have participation from HKEX, 19 banks, and
five corporates on trials to test the network using actual trade and capital
market transactions.
October ▪ Huawei announced that its flagship Mate 40 smartphone series will include a
hardware wallet for the digital RMB.
▪ Cambodia’s central bank launched a blockchain-powered payment system,
named Project Bakong.
▪ The People’s Bank of China published a draft law to provide the legal
framework for the digital RMB.
▪ The European Central Bank published a comprehensive report on the possible
issuance of a digital euro, and launched a public consultation on the topic.
▪ The Bank of Japan said that it will start testing its own CBDC in 2021.
▪ Seven central banks and the BIS released a report identifying the foundational
principles necessary for any publicly available CBDCs to help central banks
meet their public policy objectives.
▪ The Bank of Korea said that it plans to test the usage of its CBDC in 2021.
September ▪ Blockchain firm ConsenSys was awarded the contract to lead phase two of the
cross-border CBDC project between Hong Kong and Thailand (Project
Inthanon-LionRock).
▪ Chinese e-commerce company JD.com entered a partnership with the
People’s Bank of China on digital currency projects.
▪ Mastercard launched a virtual testing platform that allows central banks to
test CBDCs.
August ▪ China announced that it will expand the trials of digital RMB to the Beijing-
Tianjin-Hebei region, Yangtze River Delta, and Greater Bay Area.
July ▪ The Bank of Thailand entered the third phase development of its CBDC and
planned to expand the use of CBDC among large businesses.
▪ The Monetary Authority of Singapore announced the conclusion of the final
phase of its blockchain payments project, Project Ubin.
▪ China’s food delivery giant Meituan, ride-hailing giant DiDi and video
streaming platform Bilibili joined the testing of digital RMB.
Sources: cointelegraph.com, DBS

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Update on Digital Currencies December 7, 2020

e-RMB

China’s CBDC tests leap forward in Shenzhen. In October, over 47,000

consumers in Shenzhen spent RMB8.8mn at the 3,389 designated shops
during a week-long trial of digital currency. A total of RMB901,000 of
additional credit was also transferred into the official Digital Renminbi
app. Users can use any of the extra funds they added to their accounts
even though the trial has finished.

A numerous of trials also took place in Suzhou, Chengdu and Xiongan. In

Suzhou, the e-RMB was used for paying salaries to some public servants,
while in others, the trial primarily focused on food and retail. More than
RMB2bn has been spent using China’s new digital currency so far in 4
million separate transactions, according to the PBOC. We believe the
next batch of pilot program will include other major metropolitan areas
such as Beijing, Tianjin, Shanghai, Guangzhou and Chongqing. The aim is
a countrywide launch by the 2022 Winter Olympics in Beijing.

Reportedly, some major state-run commercial banks have begun large-

scale internal testing of a digital wallet application for use with the e-
RMB. PBOC is also working with lifestyle apps including ride-hailer Didi
Chuxing and food delivery company Meituan, with plans to make the
digital currency available for online transactions in the upcoming trials.

Meantime, authorities are testing new functionalities that has not

NFC technology offered by the third-party payment apps (i.e. Alipay, Tenpay). One
allows offline
example is to enable mobile phone users to transfer funds simply by
transactions
touching their devices together, even if both are offline. According to
the authority, users in the upcoming pilots will be provided access to the
e-RMB even without a phone number or bank account information. This
makes sense since CBDC is legal tender, meaning it should be exchanged
without needing a bank as an intermediary. Such development could
facilitate the CBDC use by foreigners, who can directly exchange foreign
currencies for the digital yuan without carrying cash or opening an
onshore bank account.

Indeed, one of Huawei’s soon-to-be launched smartphone will include

an integrate hardware digital wallet with dual offline transaction
capability. In the absence of a WiFi signal, p2p payments can be made
by touching phones using NFC communication technology. In addition,
the preinstalled e-wallet means the device can provide a higher level of
security than using an app or web service. It's unclear at this stage if the

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Update on Digital Currencies December 7, 2020

phone users will be able to directly transfer any bank savings into the
digital wallet. But the Huawei phone is yet another development that
the adoption phase is not that far off. And other Chinese phone makers
will likely follow suit.

There is a macro angle too. For a start, Chinese smartphone vendors

dominate about half the global mobile phone market due to their
competitive pricing and attractive product range. With the preinstalled
digital wallet, e-RMB going forward could be exported overseas more
efficiently. Africa, for instance, is well positioned for the rapid adoption
of the digital yuan given Chinese huge consumer device markets on the
continent.

Already, the proportion of RMB settlement in Africa has increased from

Penetrating 5% in 2015 to about 12% in 2018 as bilateral ties deepened. Besides, a
overseas markets significant volume of cryptocurrency transactions is now being
conducted between Africans and individuals/businesses in other
regions, according to Chainalysis 2020 Geography of Cryptocurrency
Report. This is in part due to the high volatility of domestic currencies,
which makes it difficult and expensive to conduct business in dollars.
The yuan, given its stability, could be integrated into the continent’s
payment ecosystem that is increasingly dominated by Chinese
companies.

Global smartphone market share (Q320)

Samsung

20% Huawei
22%
Xiaomi
4% Apple

8% Oppo
14%
Vivo
8% Realme
11%
13%
Others

Source: counterpointresearch.com, DBS

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Update on Digital Currencies December 7, 2020

European Central Bank on digital euro

ECB President Christine Lagarde stated that the central bank is not
“racing to be first” but her hunch is that Europe will issue CBDC. In
October, the ECB launched a public consultation and experimentation
on digital euro. According to the report, there are several scenarios that
could induce the Eurosystem to issue a digital euro. In general, a digital
euro should achieve the objectives related to core central bank
functions and foster formulating general economic policies of the EU.
The ECB also addressed the potential impact on banking sector,
monetary policy and financial stability. For instance, funding costs of
banks and hence interest rates on bank loans may increase when
depositors transform their commercial bank deposits into central bank
liabilities. Banks might in turn decrease the supply of credit, thereby
affecting the level of aggregate investment and consumption of the real
economy. During times of crisis, depositors may rapidly exchange their
commercial bank note into digital euro. The risk of bank runs will
increase. Also, issuance of CBDC affects the central bank’s reputation as
well as safety and efficiency of retail payments. As such, the ECB sets up
the following requirements for a digital euro:

Requirements
1 Enhance digital efficiency to support the digitalisation of the European economy and the
strategic independence of the European Union
2 Equip with cash-like features in response to a significant decline in the role of cash as a
means of payment
3 Possess competitive features in view of the potential usage of foreign CBDCs or private
digital payments in the euro area
4 Could enhance new monetary policy transmission channel
5 Serve as a back-up system for cash to mitigate risks to the normal provision of payment
services
6 Could foster the international role of the euro
7 Support improvements in the overall costs and ecological footprint of the monetary and
payment systems
8 Equip with ability to control the amount of digital euro in circulation to avoid its use as a
form of investment and the associated risk of large shifts from private money to digital euro
9 Cooperate with market participants across all euro countries
10 Comply with the regulatory framework
11 Ensure safety and efficiency in the fulfilment of the Eurosystem’s goals
12 Enable easy accessibility throughout the euro area
13 Allow conditional use by non-euro area residents only to ensure that it does not contribute
to excessively volatile capital flows or exchange rates
14 Ensure cyber resilience
Source: ECB, DBS
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Update on Digital Currencies December 7, 2020

On practical level, the ECB also defined two approaches for the back-end
infrastructure - centralised approach and decentralised approach. Of
which, two models could be derived from each approach.

The centralised approach would allow users to deposit and withdraw the
CBDC by means of electronic transfers. This can be separated into two
models: (i) Direct access: payments are instructed by end users in the
central bank infrastructure; and (ii) Intermediated access: payments are
instructed by supervised intermediaries managing accounts with the
central bank on users’ behalf.

Direct access Intermediated access

Source: European Central Bank

The decentralized model could be used to provide a bearer digital euro

that either end users or supervised intermediaries acting on their behalf,
would verify any payment. It could again be achieved through two
models: (i) Direct end-user access to the bearer digital euro; (ii) Hybrid
bearer digital euro and account-based infrastructure.

Direct end-user access to Hybrid bearer digital euro and

a bearer digital euro account-based infrastructure

Source: European Central Bank

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Update on Digital Currencies December 7, 2020

IMF’s four stylised scenarios of CBDC/GSC adoptions

Scenario 1: Scenario 2: Scenario 3: Scenario 4:
Niche use for cross- Greater currency Global adoption Global adoption with
border payments substitution in some multipolarity
countries
• Niche adoption for • CBDC or GSC induces • Global adoption of a • Multipolarity where a
specific international greater use of foreign single GSC. few CBDCs and/or
transactions (e.g., currency in countries GSCs with independent
• The GSC has its own
remittances). with lower policy units of account
unit of account.
credibility or coexist and compete.
• No adoption for local
underdeveloped
transactions. • Competition can be
payment systems.
either within or across
• CBDC or GSC are countries.
widely used as store of
value, means of
payment, and unit of
account.
Source: IMF, DBS
IMF on digital money across borders

The International Monetary Fund, in a recent paper, discussed the

implication of using digital money – CBDCs and Global Stablecoins 1
(GSCs). The paper defines the cross-border use of currencies as (i) use
of currency for international transactions, and (ii) domestic use of
currency issued by a foreign entity. The use of a currency in these two
types of transactions are affected respectively by network effects (or
synergies) across monetary functions (e.g. global use of USD in both
international trade and international finance) and the unsound
domestic macroeconomic condition. Adoption of CBDCs or GSCs will
speed up if such macro environment emerges. In addition, digital money
could potentially bring in benefits such as lower transaction costs, ease
of access currency / exchanges. Specifically, GSCs could foster access to
complementary services or bundling 2 . Depending on the pace of
development, there could be four scenarios in the future.

On macro-financial consequences, foreign CBDCs and GSCs can affect

the transmission of monetary policy as it will be increasingly difficult
for central banks to control over domestic liquidity. The effectiveness
of monetary policy on money supply and nominal interest rates will
therefore be distorted. Also, use of CBDCs and GSCs impacts financial
stability by posing additional incentives for risk taking/speculating

1 GSCs are stablecoins, a type of private digital money, issued by Big Techs with the potential for widespread adoption.
2 For instance, Alipay links its e-money to China’s largest online retail site.

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Update on Digital Currencies December 7, 2020

activities and thereby raising vulnerabilities. Meanwhile, the lower

transaction cost and reduction in transaction friction could in turn
increase the capital flow volatility. And with increasing use of foreign
CBDCs/GSCs, central banks will augment foreign reserves for
precautionary motives. But for sure, the magnitude of impacts could
vary across the four scenarios. i.e. the adverse impact in scenario 1
would be modest compared to that in scenario 4. After all, preserving
macroeconomic and financial stability remains as the main challenge for
authorities to adopt digital currencies.

Cambodia’s Bakong payment system

In late October, the National Bank of Cambodia (NBC) launched the

Bakong payment system that provides a common platform for
commercial banks, microfinance institutions (MFIs) and payment service
providers (PSPs) to deliver e-wallet and money transfer services to
consumers without the need for a bank account. While it is built on
distributed ledger technology, the central bank stated that this is not
a CBDC. Instead, it facilitates transactions in both USD and riel by
scanning QR codes or inputting phone numbers of payees. Currently,
payment systems in Cambodia is a rather complex one, with MFIs and
PSPs operating independently. To alter such fragmented financial
services landscape, NBC aimed to use Bakong payment system to
provide market participants a common and interoperable platform via
peer-to-peer and wallet-based, real-time and round the clock
infrastructure. Hopefully, it could improve the country’s financial
inclusion by extending the service to the large unbanked population. For
now, only 5% of the population owns a bank account.

Private sector initiatives

Paypal has recently obtained the first-of-its-kind conditional Bitlicense

offered by the New York State Department of Financial Services. This
enabled the company to provide cryptocurrency trading service on its
digital wallet. Initially, it facilitates trading activities for Bitcoin,
Ethereum, Bitcoin Cash and Litecoin. There are no service fees when
buying or selling cryptocurrency through the end of this year, and there
are no fees for holding cryptocurrency. Looking ahead, PayPal will allow
customer to use cryptocurrencies as a funding source for digital
commerce at its 26 million merchants. Consumers could instantly
convert their cryptocurrency balance to fiat currency with no additional

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Update on Digital Currencies December 7, 2020

fees. All transactions will be settled with fiat currency at their current
PayPal rates.

References
1. CoinDesk: CoinDesk Monthly Review October 2020
2. CoinDesk: CoinDesk Quarterly Review Q3 2020
3. Digital Asset Research: Institutional Digital Asset Ecosystem Q3 2020
4. European Central Bank: A digital euro
5. Grayscale: Digital Asset Investment Report Q3 2020
6. International Monetary Fund: Digital Money Across Borders: Macro-
Financial Implications
7. McKinsey: The 2020 McKinsey Global Payments Report
8. PayPal: PayPal Launches New Service Enabling Users to Buy, Hold
and Sell Cryptocurrency
9. The Phnom Penh Post: NBC’s Serey: ‘Bakong not a CBDC’

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Update on Digital Currencies December 7, 2020

Group Research
Economics & Macro Strategy

Taimur Baig, Ph.D.

Chief Economist - G3 & Asia
+65 6878-9548 taimurbaig@dbs.com

Chang Wei Liang Radhika Rao

Strategist Economist – Eurozone, India, Indonesia & Thailand
+65 6878-2072 weiliangchang@dbs.com +65 6878-5282 radhikarao@dbs.com

Nathan Chow Irvin Seah

Strategist - China & Hong Kong Economist - Singapore, Malaysia, & Vietnam
+852 3668-5693 nathanchow@dbs.com +65 6878-6727 irvinseah@dbs.com

Eugene Leow Samuel Tse

Rates Strategist - G3 & Asia Economist - China & Hong Kong
+65 6878-2842 eugeneleow@dbs.com +852 3668-5694 samueltse@dbs.com

Chris Leung Duncan Tan

Economist - China & Hong Kong FX and Rates Strategist - Asean
+852 3668-5694 chrisleung@dbs.com +65 6878-2140 duncantan@dbs.com

Ma Tieying, CFA Philip Wee

Economist - Japan, South Korea, & Taiwan FX Strategist - G3 & Asia
+65 6878-2408 matieying@dbs.com +65 6878-4033 philipwee@dbs.com

Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations).

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Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.
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Page 13
GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates)
The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained
from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness,