ASEAN is a regional organization that serves as a platform for cooperation among 11 countries in Southeast Asia. Since its establishment in 1967, various economic agreements have been made, including the ASEAN Free Trade Agreement (AFTA). The 2023 ASEAN Summit in Jakarta demonstrated a strong commitment to enhancing economic and financial integration. One of the most significant steps in this regard is the agreement among central banks to use local currencies for transaction settlements and the creation of a connected regional payment system.
Cross-Border Payments in ASEAN
Indonesia, Singapore, Malaysia, Thailand, and the Philippines have agreed to cooperate on cross-border payments in ASEAN using QR Codes or e-wallets. In this cooperation, the five ASEAN countries have agreed to use QR Codes, fast payments, data, RTGS, and local currency transactions as payment methods in the region. In January 2023, Indonesia and Malaysia conducted a trial of a cross-border payment system based on QR Codes. This system has been an official cross-border payment method since May 8, 2023. Previously, the real-world results of cross-border payments using QR Codes had been successfully implemented between Indonesia and Thailand.
This is a highly strategic step to strengthen cooperation in the region, address global issues of dependency on the US Dollar, and also assert ASEAN’s independence in a multipolar global political landscape.
The Vision for Economic and Financial Integration in ASEAN
The vision for economic and financial integration in ASEAN could be more optimal and efficient if blockchain technology is adopted. Below are some recommendations on how the blockchain system can be integrated to realize this vision.
Transaction Settlements with Local Currencies
Central banks from several ASEAN countries, including Indonesia, Malaysia, and Thailand, have signed an agreement to use their local currencies for transaction settlements. This move is expected to reduce dependency on the US dollar and help maintain the stability of local exchange rates.
How Can Blockchain Help?
Transparency and Security: Blockchain offers a higher level of transparency and security, which is crucial in an international context. For example, in 2016, Bangladesh Bank fell victim to hacking that resulted in a loss of about $81 million, with money being transferred to a bank branch in Manila, Philippines. One reason this hacking was possible was due to the lack of transparency and security in the SWIFT system used for international transactions. If a blockchain system is used, each transaction would be recorded and easily traceable, making it more difficult for hackers to cover their tracks.
Efficiency and Speed: This technology can speed up transaction processes, which is crucial for businesses that require high liquidity. Blockchain technology has the potential to significantly accelerate transaction processes, especially in a cross-border context. For example, transactions that usually take several days for verification and settlement through traditional banking systems could be completed in minutes or even seconds using blockchain.
Lower Transaction Costs: With minimal transaction fees, blockchain could be an efficient solution for cross-border transactions. In the context of remittances or cross-border money transfers by migrant workers, the lower transaction fees from blockchain could have a significant impact. According to data from the World Bank, the average global cost for sending remittances is about 6.8% of the amount sent. With blockchain, some fintech companies claim they can reduce this cost to less than 1%.
Regional Payment System
In addition, there is also an initiative to create a connected regional payment system. This will facilitate cross-border transactions and could act as a catalyst for regional economic growth. Data from Bank Indonesia states that the number of transactions by Indonesian tourists shopping in Thailand using Thai QR Codes reached 14,555 transactions, with a transaction value of Rp 8.54 billion. Meanwhile, the number of transactions by Thai tourists in Indonesia using QRIS was 492 transactions, with a value reaching Rp 114 million.
How Can Blockchain Help?
Smart Contracts: Smart contracts on the blockchain can be used to automate many aspects of financial transactions. With smart contracts, payments can be programmed to automatically execute when certain conditions are met, such as when a tracking system shows that goods have been received. This not only speeds up the transaction process but also reduces the risk of fraud and increases trust between the parties involved. In the context of cooperation between central banks in ASEAN, the implementation of smart contracts could be a highly effective instrument for ensuring compliance with regulations and agreements, while increasing efficiency and transparency.
Micro-Payments: Blockchain enables fast and efficient micro-payments, which can be very useful for SMEs and the tourism sector. Micro-payments often pose a challenge in traditional financial systems due to relatively high transaction fees. In the context of SMEs and the tourism sector, the ability to make micro-payments quickly and efficiently can have a significant impact. Blockchain technology allows small transactions with minimal or even zero fees, and this can be done in seconds without the need for lengthy verification processes. For example, a tourist in Thailand could pay for local transportation services or purchase goods from small vendors using digital currency, and the transaction could be completed almost instantly. This not only facilitates transactions for consumers but also opens up new opportunities for SMEs to reach a broader customer base without being burdened by high transaction fees.
Inclusion of More Countries: With easier and cheaper infrastructure to implement, countries with smaller economies will also find it easier to join. In the context of cooperation between central banks, this means that countries like Cambodia, Laos, or Myanmar, which may not have extensive technological or financial resources, could also more easily join regional initiatives. With lower initial costs and ease of implementation, blockchain could act as a catalyst enabling broader participation from ASEAN member countries, thereby creating a more inclusive and integrated financial ecosystem across the region.
Does ASEAN Need Its Own Blockchain System?
The choice between building its own blockchain platform or using existing platforms like Ethereum, Binance, Bitcoin, Cardano, etc., depends on various factors, including specific needs, resources, and the strategic goals of the central banks in the ASEAN region. If control, data security, and customization are priorities, then building their own platform might be a more suitable choice. However, if the goal is to quickly implement a solution at a lower cost, using an existing platform could be a good option.
The vision of cooperation among central banks in ASEAN is a positive step towards tighter economic and financial integration. Blockchain technology has the potential to accelerate and facilitate this process. By considering these steps, central banks in the ASEAN region can fully leverage the potential of blockchain to achieve a more tightly integrated economic and financial vision, while minimizing associated risks.