Creating a special-purpose Central Bank digital currency in Bangladesh

Illustration: TBS

The advent of digital currencies has transformed the financial landscape globally. 

Bangladesh, in its pursuit of a robust and inclusive financial system, has been exploring the potential of a Central Bank Digital Currency (CBDC) tailored for the retail market. 

The same step can be taken for the capital market as well. 

The capital market of Bangladesh is now going through some reforms and some measures have already been discussed and are being actioned. The following is one such transformation that can also help address such reforms of Bangladesh's capital market. 

Why a special purpose CBDC for the capital market?

Bangladesh recently faced a significant depletion of its foreign currency reserves, which have dropped from $46 billion to less than $18 billion in just two years. The decline in foreign investments in Bangladesh's capital market and the significant depletion of the country's foreign currency reserves necessitate innovative financial solutions. 

To address this concern, the government could propose creating a new currency, cTaka (short for CBDC Taka), equivalent to some dollar values to start with, say for arguments' sake, $1 billion. 

This currency will be fully convertible for capital market investments to make it attractive to foreign investors.

Special Purpose CBDCs (spCBDCs) offer a targeted approach to address specific economic challenges without the broader implications associated with general-purpose CBDCs. spCDBDCs, focusing on a specific segment will be designed to perform specific functions, such as facilitating transactions within a particular sector, which in this case is the capital market. 

This will also help reduce risks as by limiting the scope of spCBDCs, the risks associated with financial instability and the disruption of existing financial systems are minimised. 

A general-purpose CBDC might imply significant risks to the current financial system's stability and may not improve fiscal and monetary policies effectively. spCBDCs can be tailored to improve the efficiency of specific financial operations. 

For instance, a CBDC designed for the capital market can streamline transactions, reduce settlement times, and enhance transparency.

In this context, introducing cTaka as a special-purpose CBDC dedicated to the capital market aims to revitalise foreign investment, stabilise foreign currency reserves, and foster economic growth through increased market participation and liquidity. 

spCBDCs will help enhance transaction efficiency as they will facilitate faster and more secure transactions in the capital market. spCBDCs will also help increase market accessibility as they will enable broader participation in the capital market, including remote and underserved areas. 

They will strengthen financial stability by reducing risks associated with traditional payment systems and enhance the robustness of financial infrastructures. spCBDCs will promote innovation as they will encourage the adoption of cutting-edge financial technologies within Bangladesh's financial ecosystem. 

Foreign investments in Bangladesh's capital market are currently at an all-time low. To revitalise foreign interest and investment, a novel approach is required. spCBDCs will also help attract increased foreign investments into the capital market through innovative financial solutions. 

One such approach involves creating a new trading board at the Dhaka / Chittagong Stock Exchanges (DSE/CSE), where shares will be traded in cTaka. This initiative aims to leverage the digital version of the Bangladeshi taka to attract foreign investors and enhance market liquidity.

The proposed framework

The first thing that we need to address is the Issuance and Management of cTaka. For this, Bangladesh Bank will be the sole issuer and manager of cTaka. cTaka will also be a fully convertible digital currency for capital market investments only, initially backed by an equivalent value of, say, $1 billion.

We then need the creation of a dedicated payment rail, ie, to establish a separate, blockchain-based payment rail dedicated to cTaka transactions. This infrastructure will ensure secure and transparent transactions. A national body can be established to manage this payment rail and oversee the blockchain network. 

This also means we need a National Blockchain Network (NBN). We have to develop a national blockchain network to support the cTaka ecosystem. This network will facilitate seamless and secure transactions, enhancing trust and efficiency. 

The NBN will need to ensure interoperability with existing financial market infrastructures (FMIs) like Central Securities Depositories (CSD, i.e. CDBL in Bangladesh), the matching engines of the Dhaka and Chittagong stock exchanges, the Bangladesh Electronic Funds Transfer Network or BEFTN, the Real-Time Gross Settlement (RTGS) systems of the Bangladesh Bank, etc.

We will also need Regulatory Adjustments, i.e. to modify regulations to allow the listing of shares in cTaka on a new trading board at the DSE/CSE as well as mandate or encourage foreign companies operating in Bangladesh to list their shares on this new trading board, facilitating trading in cTaka. 

We will also need to create market development initiatives, e.g. to promote the listing of new shares of current blue-chip companies on the cTaka trading board to enhance market liquidity. 

We will provide incentives for foreign companies and investors to participate in the cTaka ecosystem, such as tax benefits (0% Capital Gain Tax and reduced tax on dividends if a certain percentage of dividends are ploughed back into the cTaka exchanges) or reduced transaction fees, etc.; leverage the recent policy allowing offshore USD accounts, for that matter, any foreign currency-denominated accounts, by permitting these funds to be invested in the cTaka trading board, etc. 

These will further attract foreign investments into the capital market, providing an additional avenue for foreign capital inflows.

The benefits of such convertible cTaka along with a cTaka trading board, are many. 

Firstly, there will be increased foreign investment as a dedicated cTaka trading board will attract foreign investors, boosting capital inflows into the market. 

Secondly, there will be enhanced liquidity in the market as the listing of blue-chip companies and foreign entities in cTaka will create additional liquidity, making the market more dynamic. This enhanced liquidity will also be multiplied due to the new ability of real-time (T+0) settlements in cTaka. 

Thirdly, there will be economic stability in the country as a stable and attractive digital currency can help mitigate the depletion of foreign currency reserves by encouraging foreign investment. Last, but not least, there will be technological advancements in the country, as the development of a national blockchain network will position Bangladesh at the forefront of financial technology innovation. 

The challenges

There will be challenges, of course. 

Firstly, establishing a robust and secure blockchain-based payment rail requires significant investment and expertise. 

Secondly, there will be regulatory challenges in ensuring comprehensive regulatory frameworks that adapt to evolving digital landscapes. 

Thirdly, there will be market acceptance issues in achieving widespread adoption among financial institutions, companies and investors. 

Fourthly, there will be cybersecurity risks and mitigating such risks associated with digital currencies, including cyber-attacks and data breaches. 

Last but not least, the evolution of money has always required time for people to develop trust in new forms. Historically, trust in money has been built because people saw that it worked and improved their lives. 

Building trust in CBDCs, specifically cTaka, will also require time. This trust will be cultivated through the transparency and honesty of government entities and central banks, particularly the solid cooperation between the Ministry of Finance (MoF), Bangladesh Bank (BB), and the Bangladesh Securities and Exchange Commission (BSEC) about the potential benefits and risks of digital currencies. 

Ensuring that accurate and easily accessible information is available about cTaka is another critical step. Education and awareness campaigns will be essential to counteract misinformation and encourage trust and adoption.

The introduction of cTaka in Bangladesh's capital market holds the promise of revolutionising the financial sector by enhancing efficiency, security and inclusivity. The joint and proactive approach by MoF, BB and BSEC towards exploring this innovative financial instrument can pave the way for a more dynamic and resilient capital market, attract foreign investment and foster economic growth.

Sketch: TBS

Tarique A Bhuiyan is the former Managing Director of Dhaka Stock Exchange.  He has also worked as a consultant for TCS, Accenture, and Infosys.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard