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A new digital currency for China

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Coronavirus continues to infect global finances even as lockdowns are lifted

We think the official launch of China’s central bank digital currency is drawing closer. This could be a watershed moment that puts China in the vanguard of innovation to make payments safer, quicker and more efficient.

The People’s Bank of China started researching a central bank digital currency as early as 2014. The ‘e-RMB’, as the media call it, last hit the headlines in April 2020. Reports suggested that digital currency trials were taking place in a number of Chinese cities.

The Governor of the People’s Bank of China clarified that there is no timetable for the launch of a digital currency. From various speeches and media interviews given by the head of its Digital Currency Research Institute, however, we think a launch might be close.

Numerous other jurisdictions are also accelerating their research. In late 2019, the Bank for International Settlements (BIS) surveyed 66 central banks on the topic. It found that 80 per cent were engaging in some sort of study on central bank digital currencies. About 10 per cent had developed pilot projects. They may include Sweden’s Riksbank, which is believed to be near to launching its own ‘e-krona.’

There are several reasons why so many central banks are exploring this idea. Some think digital currencies have the potential to improve financial inclusion, especially in developing markets, according to the BIS survey. Centrally issued digital currencies could also make payments safer, especially compared with new forms of private money creation. And they could make payments more efficient.

These potential benefits could all apply to China, where electronic alternatives to cash are already on the rise. The number of users making payments with their mobile phones stood at 765 million as of March 2020, roughly 55 per cent of the population. A centrally issued digital currency would provide a reliable alternative to privately developed e-payment systems, including cryptocurrencies developed abroad.

Increasing use of centrally issued electronic money could have broader public policy benefits. Data on the usage of digital money would make it easy for policymakers to better understand consumption and credit growth in the economy, helping to inform monetary policy. A further decline in the use of cash may also be a good thing in itself, since cash is the easiest method for people to engage in prohibited activities anonymously. Digital money, by contrast, leaves a trail.

Central bank digital currencies could also transform cross-border payments, making them cheaper and more efficient than under the current correspondent banking model. Incorporating distributed ledger technology solutions in an international settlement system could allow for peer-to-peer transfers, smart contracts, automatic processing, and real-time 24/7 access – features that would significantly improve cross-border payment efficiency, provided more countries also adopt distributed ledger technology.

With many authorities likely to re-examine their settlement systems, there could even be a first-mover advantage for a central bank at the forefront of the new technology. This is another incentive to develop at speed. We think the next moves on central bank innovations such as the e-RMB are well worth watching.

First published 18 June 2020.

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