While other central banks have mulled central bank digital currencies (CBDCs), China could be a global pioneer – depending when it issues. It recently launched a joint project with large commercial banks and tech firms to explore possible implementation this year based on a two-tier system where the central bank will issue digital currency indirectly through them.
Unlike cryptos, CBDCs are underwritten by central banks, granting them status as legal tender. Moreover, CBDCs are expected to offer benefits in terms of transactional efficiencies, central bank oversight, technological innovation and financial inclusion.
The digital yuan, officially known as the Digital Currency Electronic Payment (DCEP), had been in the pipeline over the past five years. The envisioned two main use cases for the digital yuan are facilitate retail payments and create a new medium for cross-border payments.
Not For Speculation
The head of the People’s Bank of China’s (PBOC) digital currency research subsidiary, Mu Changchun, said China’s cryptocurrency will not need a currency basket to maintain a stable value. The digital yuan would be distinct from other forms of cryptocurrencies, including Libra.
According to Mr Mu, the [digital yuan] currency is used for spending and not for speculation. It does not have the characteristics of bitcoin speculation, nor does it require the currency basket assets to support the value of the currency like stable currency.
The currency is not for speculation. It is different to bitcoin or stable tokens, which can be used for speculation or require the support of a basket of currencies
– Mu Changchun
Officials only began revealing details about DCEP soon after Facebook unveiled Libra earlier this year. Also designed as a cheaper and faster remittances solution, Libra’s value is set to be pegged to a basket of major world currencies, including euro, sterling and U.S. dollar, supplied by Association members.
The top-level design, formulation, functional research and testing of the Digital Currency Electronic Payment had been completed. The next step for the bank is to roll out pilot programmes before the digital currency launch.
The bank would soon be at the point where it could start gradually issuing the digital yuan to Chinese citizens through its commercial partners, which include Tencent and Alibaba-backed Ant Financial, Mu added.
Rise in Dominance
Mu said the bank will guarantee cash-like levels of privacy for
transactions, while still being able to trace what it suspects to be illegal
China’s economy accounts for about 15 percent of
global GDP and its influence is expanding rapidly in emerging economies with
the Belt and Road initiative, China’s CBDC may boost the internationalization
of the yuan. It may also reduce U.S. dollar dominance in trade and financial
transactions, which has been excessively large as the U.S. economy accounts for
only a quarter of global GDP while its relative influence continues to drop.