What is the Motive Behind Launching a CBDC in China?


In January 2017, the PBOC hosted a meeting on digital money at its headquarters in Beijing, inviting representatives from online payment companies, academia, research institutions, and financial institutions. In addition, officials discussed how to provide an incentive for technology and payment firms to issue more e-money, encourage more people to use it, and ensure that the system is secure enough. Also, discussed is the framework of the digital yuan’s design.

Digital currency has been coined “e-CNY” and is an integral part of China’s move away from cash toward a cashless society. It will be launched alongside other digital currencies, including the e-yuan and e-dollar.

The CBDC is issued by the People’s Bank of China (PBOC) and was reportedly under development by several major commercial banks in China, including the Industrial and Commercial Bank of China (ICBC), one of the largest commercial banks in Asia, till its release in 2021. The PBOC issued a timeline for the launch and revealed many details about the currency just before the launch. The PBOC’s announcement followed the release of the People’s Bank of China’s Digital Currency Paper, which indicated that the PBOC and commercial banks are working to develop a CBDC. 

How will the digital yuan work?

 There will be two digital currencies, also called “counters,” existing at the same time. The commercial banks’ counters (their newly created central bank digital currency) will be credited to the accounts of individual citizens, who can spend those using mobile apps and other payment tools. 

The first hurdle in the development of CBDC was that there was a need to have a consensus on policy, including how to regulate it and which institutions are involved in issuing and managing it. The second challenge with CBDC was that new legal frameworks must be implemented by go to oversee its development, use, and management.

Unpacking China’s Digital Currency:

It’s too soon to speculate on the possible impact of the e-CNY program. Still, the creation of a sound legal framework for it will set the stage for quicker development and commercialization of digital currency in China.

The PBOC’s efforts could have a significant impact on the global digital currency landscape and might give birth to a new era of “decentralized” global currencies and payment systems. . The technical progress made by PBOC may be used as a reference by other central banks considering implementing their CBDC system. Moreover, the digitization trend has led to new players in China’s digital payments sector. Alipay and WeChat Pay are two of China’s most valuable companies, with a combined market capitalization of over $600 billion. The adoption and use of digital currency will potentially increase growth opportunities for existing industry players and new entrants.

The Industrial Bank of China Ltd., the country’s No. 2 lender by assets, will be among those participating in a central bank initiative to develop a digital currency that allows lenders to transfer funds to customers’ accounts at any time, according to people familiar with the matter.

Digital Yuan for a cashless society:

The digital currency will be able to compete with other payment tools such as WeChat Pay and Alipay. The PBOC’s initiative comes when the renminbi is promoted as an international reserve currency. In addition, rising interest in using digital currencies, including bitcoin, has raised money laundering and terrorist financing concerns.

 PBoC’s CBDC will help the country foster an environment of liquidity, which will facilitate capital flow into the economy and spur business activity, according to PBOC Deputy Director Pan Gong sheng. The PBOC’s announcement may further develop local virtual currencies such as Shanghai Renminbi Coin. The e-yuan could complement other payment options or even replace them altogether.

Digital yuan will decrease inflation:

According to insiders familiar with the matter, China’s digital currency would reduce the costs of printing and circulating physical banknotes. In addition, reliance on digital payments would aid the PBOC as it seeks to curb inflation by keeping a lid on money supply growth. It will also help the central bank in its fight against debt risks and financial fraud, as well as in its efforts to manage capital outflow.

The emergence of China’s digital currency could challenge existing cross-border payment systems such as SWIFT and Ripple. By creating a cross-border network of Digi-banks, China aims to promote the international use of its currency.

Digital Yuan decreases the cost of transactions:

Digital yuan would be more efficient and convenient than the existing system, according to insiders familiar with the matter. It could reduce the cost of transactions (e.g. the transaction fee) caused by banknote circulation, according to insiders familiar with the matter. The PBOC is promoting the digitization of financial transactions to make its currency less volatile and strengthen control over inflation.

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