Only a few months ago, central banks were stalling on plans to issue their own digital currencies. Now China is taking an early lead in the race to launch one.
According to press reports this week, a senior official from the world’s largest trading nation says China will soon produce a digital version of its domestic currency, the yuan.
The new digital yuan will allow citizens to transfer money to each other using mobile phones, even without a connection to a mobile network.
In comments reported by Shanghai Securities News, Mu Changchun, head of the Digital Currency Research Institute at the People’s Bank of China, said the central bank will distribute the new digital currency via the private sector.
Mu said that the central bank will launch the state-backed digital currency in the next few months, initially via 7 ICBC, China Construction Bank, Bank of China, Agricultural Bank, Alibaba, Tencent and UnionPay.
China is already a global leader in payment technology, with multi-purpose mobile apps like Tencent’s WeChat offering services like messaging, taxis, food, shopping and dating in addition to payments.
WeChat has over 1 billion monthly active users and derived over half its 2018 revenue from payments. Together with its rival Ant Financial, owned by Alibaba, WeChat controls 90 percent of online payments in China.
Ant Financial also has a significant Asian regional presence, with operations in India, Thailand, the Philippines, Indonesia, South Korea, Malaysia, Pakistan, Bangladesh and Hong Kong.
Western social media firms are well behind in the global payments race. Facebook, which has recently unveiled plans to launch a new digital coin called Libra, generated less than 1 percent of its revenues from payments last year.
The public sector has also been struggling to catch up with progress in the private sector and central bank digital currencies have been a long time coming.
According to a report published by the Bank for International Settlements (BIS) in January, only five of 63 central banks surveyed by the BIS had progressed to pilot projects and no central bank had yet declared firm plans to issue a CBDC.
“Most central banks appear to have clarified the challenges of launching a CBDC but they are not yet convinced that the benefits will outweigh the costs,” the BIS said at the time.
However, the debate has since moved on at a rapid pace.
The People’s Bank of China’s Mu Changchun cited national interest for making a step towards the digital version of the yuan, saying his primary purpose was to protect monetary sovereignty and the status of the legal currency, and that it was necessary to plan ahead.
According to the Shanghai Securities News, Mu did not elaborate on whether the CBDC would be account-based or token-based.
This distinction matters: an account-based digital currency would grant the public direct access to accounts at the central bank. Up to now, central banks have shied away from this option as it could deplete the deposits held at banks, with knock-on effects on bank lending and the stability of the banking system as a whole.
“A key decision for society is the degree of anonymity”
However, token-based digital cash would be transferable from peer to peer without registration in an account. This could in principle preserve user anonymity, like traditional cash, though this would depend on the design of the digital money.
“Token-based CBDC can be designed to provide different degrees of anonymity,” the BIS said last year.
“A key decision for society is the degree of anonymity vis-à-vis the central bank, balancing, among other things, concerns relating to money laundering, financing of terrorism and privacy.”
According to the Shanghai Securities News, Mu said China’s new state digital currency will maintain the attributes and value characteristics of cash, while also meeting the demands of portability and anonymity.
China’s CBDC initiative is likely to throw the spotlight on the US, the world’s largest economy, where the central bank has so far been reticent on any digital currency plans.
Earlier this year two researchers from the Philadelphia Federal Reserve said that while a central bank-issued digital dollar might promote efficiency in exchange, it could also raise bank funding costs.
The US is also struggling with a creaking payments infrastructure, with many transfers still made by cheque and taking days to settle. Last month the Federal Reserve said it hopes to introduce a system for real-time money transfers in the US by 2024.
The potential policy implications of introducing a CBDC are significant.
In a 2016 blog, Marilyn Tolle of the Bank of England noted the potentially revolutionary impact of a CBDC on the traditional model of central banking.
“CB coin [digital coin] issuance could have far-reaching consequences for commercial and central banking – divorcing payments from private bank deposits and even putting an end to banks’ ability to create money,” said Tolle.
China’s CBDC plans come as some global policymakers are questioning the outsized role of the US dollar in the financial system.
Last month Mark Carney, governor of the Bank of England, called for a new global settlement currency to replace the dollar, based on a basket of currencies issued by participating countries.
The Bank of England has also recently announced plans to open its payments infrastructure to non-banks.
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