Worldwide, almost all central banks are working on developing and introducing central bank digital currency (CBDC). This digital currency is to be made available to consumers, businesses, commerce, and the economy as an alternative to cash. However, there are even more reasons for the central banks’ commitment: On the one hand, with CBDC, they are reacting to the current technology-driven developments in payment transactions and want to counter the spread of private, alternative digital payment systems, such as Bitcoin or Facebook Diem. On the other hand, the goal is to support the digitalization of the economy and preserve the state’s own monetary sovereignty and relevance in international payments.
China is leading the race
With the exception of the Bahamas, which launched the digital “sand dollar” last year, China is expected to be the first major economy to introduce a digital central bank currency known as e-CNY (China.Table reported). The Middle Kingdom is thus seizing an early opportunity to play a significant – digital – role in international payments in the future.
China is already one of the world’s leading digital countries when it comes to cashless payments within its own economic area. The government wants to build on this pioneering role with the development of the digital renminbi (DCEP – Digital Currency Electronic Payment) and has been vehemently pushing the development of the e-CNY since 2016. In order to achieve this, the Chinese central bank founded the PBoC Digital Currency Research Institute in June 2017, which is responsible for the design and development of the e-CNY.
Beijing expands room for maneuver
The Chinese government has stated that a leading role in developing global technology standards – especially in the payment sector – will increase China’s competitiveness and boost the economy. However, e-CNY is intended to provide a technology boost and advance the country’s competitiveness and expand its own room for maneuver vis-à-vis large local digital technology companies such as Tencent or Alibaba. With WeChat Pay and Alipay, the latter dominates the digital payment market and has thus basically created an alternative financial system in China that can be used relatively independently of the central bank.
Therefore, the government is very interested in not leaving the entire field to commercial payment providers and possibly losing control. Access to valuable data on the payment flows and user behavior of the population is important here. It also aims to build on its status as a global driver in the development of digital payment systems and become a technology leader in blockchain. The development of cross-border financial innovations and the possibility of concluding contracts with partner countries on a yuan basis instead of a US dollar basis should also become possible with e-CNY. This would ultimately also make China less dependent on any US sanctions.
The first round of e-CNY pilot programs has already been conducted by the People’s Bank of China (PBoC). By March this year, the PBoC had conducted seven e-CNY tests, distributing a total of 160 million e-CNY (about $24.6 million). More than half a million people have received e-CNY so far, and tests in other areas are expected to follow. The PBoC is pursuing the ambitious goal of rolling out the digital yuan on a large scale at the 2022 Beijing Winter Olympics venues.
Design varies from country to country
China is pursuing a centralist approach in the design of CBDC. This means that anyone who wants to make digital payments in China in the future will not be able to avoid the digital yuan. However, even without e-CNY, the Chinese state has ways to track money flows. Most mobile payments or foreign exchange transactions go through the central clearing platform NetUnion or the China Foreign Exchange Trade System. This means that even without e-CNY, the Chinese financial supervisory authority can see how money is being spent in real time.
Technical details on e-CNY are few and far between. According to the PBoC, the benefits of e-CNY include protection of user privacy, improved tracking, lower transaction costs, and simplification of cross-border payments. According to the PBoC, e-CNY will be a legal tender to replace or supplement cash in a centralized and two-tier issuance and distribution system. Legally, its functions and characteristics are equal to cash. It will be issued by Chinese commercial banks, distributing the digital money via an app. A corresponding deposit with the PBoC backs this money. The app is designed to operate “dual offline” without network connections, meaning both the payer and the payee are in an offline mode. Presumably, no interest will be paid on e-CNY, and the amount of how much e-CNY each citizen can receive is also likely to be limited.
The US central bank, the Federal Reserve (Fed), sees less urgency in developing and introducing the e-dollar. As Chair of the Federal Reserve Jerome Powell recently pointed out during an online discussion at the Bank for International Settlements (BIS), the US central bank is not even at a “decision-making” stage. While the Fed is considering adoption and exploring potential benefits and risks, it does not have the ambition to pioneer it. Security is a top priority for Americans. The Fed also still lacks the support of Congress, which Powell said has yet to give the green light. There are also a few private sector initiatives on the digital dollar. For example, according to the Initiative Digital Dollar Project, some pilot projects on the e-dollar are set to launch in the coming months, which will also explore the potential benefits of digital central bank money. So far, US thinking on CBDC has relied on surveys from other countries. Only now do they want to start collecting their own data.
EU hesitates on the digital euro
The EU is positioning itself between a centralized and a voluntary approach. In the middle of the year, the European Central Bank (ECB) will decide whether or not the e-euro will be introduced. Unlike the US Federal Reserve, the ECB has been looking at the possibilities and benefits of a digital euro for some time. Already in 2019, ECB chief Christine Lagarde established an internal task force on the digital euro. Important issues for the Europeans include data protection and anonymity in transactions. Overall, the EU still faces some challenges related to CBDC. For example, almost 70 percent of all retail transactions in the EU are still made in cash. But it is not only the issuance of CBDC in private consumption that is a priority for the EU; digital central bank money is also to be used in industry and digital business models. Here, the use in pay-per-use models or the field of machine-to-machine payments should be mentioned above all.
China has already taken giant steps forward and is well on its way to winning the race of adopting a digital currency and becoming a technological leader in this field. But for all of China’s haste, the question remains whether Western governments and central banks can gain valuable insights from China’s e-CNY tests. After all, the Chinese system is unusual in many respects – from its tightly controlled financial system to strict capital account regulations to the huge volume of mobile payments.
However, with Europe lagging further behind in the field of digital payment services, the ECB is now picking up speed on the digital euro. Not least to set the course for the Internet of Things (IoT) at an early stage and not fall behind in the industrial environment. Banks and the private sector are already working on their own solutions here. Hesitation could open up the potential to other global technology companies and leave the exciting field of digital currencies to players from outside the industry.
Dr. Nils Beier, Managing Director, Head of Strategy for Banks and Public Sector at Accenture in DACH.