Cash & Digital Currency in China’s Near Future?
This post is also available in:
Hot on the heels of China unveiling upgraded banknotes in late August, recent announcements by the People’s Bank of China (PBOC) suggest it is about to become the first country in the world to issue a central bank digital currencyThe money used in a particular country at a particular time, like dollar, yen, euro, etc., consisting of banknotes and coins, that does not require endorsement as a medium of exchange. More. The new digital currency would serve as legal tenderMoney that is legally valid for the payment of debts and must be accepted for that purpose when offered. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered (“tendered”) in payment of a debt extinguishes the debt. There is no obligation on the creditor to accept the tendered payment, but the act of tendering the payment in legal tender discharges the debt. More or sovereign currency, initially coexisting alongside its cashMoney in physical form such as banknotes and coins. More equivalent (the renminbi yuan) but eventually replacing banknotes and coins. Intended for domestic use to begin with, the digital currency would enable direct and person-to-person retail payments, possibly using a digital wallet app for smartphone. The currency will be backed by central bank reserves, thereby reducing risk to users, much like cash.
Why the hurry?
Coming just weeks after Facebook’s announcement about Libra coin, China’s timing is no coincidence and follows detailed research by the PBOC over the past five years. While several other countries have been actively researching CBDC, it is Libra’s arrival on the scene that has prompted a more urgent response from central banks. Dutch bank, ING’s, Head Economist has predicted that digital currencies will be developed within the next 2-3 years.
Comments by Mu Changchun, Deputy Director of China’s central bank’s payments department suggest that China’s monetary sovereignty and legal currency status are under threat from Facebook’s proposals. And although electronic payments are already ubiquitous in China via popular mobile paymentA transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. More apps run by private companies such as Tencent and Alibaba, a central bank-supported system could offer more long-term reassurance for consumers. Nevertheless, there is no official launch dateThe year in which a medal or coin was minted. On a banknote, the date is usually the year in which the issuance of that banknote - not its printing or entering into circulation - was formally authorised. More for China’s digital currency, while Libra was originally slated to debut in 2020.
Benefits of CBDC, but for whom?
CBDC has been touted by economists as an effective way to manage monetary policy, especially in times of economic downturn, and as a mechanism to reduce tax evasion. In China’s case, some observers have hinted that a move towards a digital currency could be used as a vehicle to increase its global reach by internationalising the national currency, though this would presumably spark a regulatory backlash similar to the one facing Libra coin. Concerns also remain about accessibility to digital currency and the potential risks for individual financial privacy, compared to decentralised cryptocurrencies or, for that matter, cash, both of which offer greater levels of anonymity.
This post is also available in: