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Cash & Digital Currency in China’s Near Future?

Categories : Cash has legal tender status, Cash protects privacy and anonymity
October 13, 2019
Published in : Central Bank, Cryptocurrency, Regulation, Technology
One country, two systems: China's central bank is set to introduce a new digital currency that will initially sit alongside cash.
Communication Team

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 currency. The new digital currency would serve as legal tender or sovereign currency, initially coexisting alongside its cash 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 payment 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 date 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.

 

 

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