New currency war: Europe and the United States actively promote central bank digital currency research, and the digital RMB pilot is accelerating

Original title: "New Currency War: Starting with Central Bank Digital Currency"
Written by: Sui Qilin

The digital economy is becoming an important engine leading global economic and social changes and promoting high-quality economic development in my country. The central bank's digital currency is the cornerstone of the development of the digital economy and the high ground of future global economic and financial competition.

Since 2020, the development momentum of central bank digital currencies has been in the ascendant. Many countries in the world are actively promoting the research and experimentation of central bank digital currencies, and the progress of China's digital RMB has also attracted widespread attention.

The United States and many European countries are actively researching and promoting central bank digital currencies

The global exploration of central bank digital currency (CBDC) is in full swing. A survey of central banks by the Bank for International Settlements in early 2021 found that 86% of central banks are actively studying the potential of CBDC, 60% of central banks are experimenting with this technology, and 14% of central banks are deploying related pilot projects.

Image source: Twitter

Judging from recent developments, international discussions on central bank digital currencies have become increasingly intense, and many sovereign states, represented by the United States and European countries, are actively researching and promoting related work.

On April 19, UK time, the Bank of England and the UK Treasury announced the joint establishment of a central bank digital currency working group to coordinate the exploration of the development of central bank digital currency. Central bank digital currency will be a new form of digital currency issued by the Bank of England for use by households and businesses. Similar to the digital RMB, the UK's central bank digital currency will coexist with cash and bank deposits, rather than replace them.

The Bank of England also mentioned in its previous statement on central bank digital currency that the government and the Bank of England have not yet made a final decision on whether to introduce CBDC in the UK, and will further communicate with stakeholders on the potential benefits, risks and feasibility of introducing CBDC. At the same time, the Bank of England will also consider the impact of digital currency on data security and user privacy.

The Bank of England's digital currency working group will be co-chaired by Jon Cunliffe, deputy governor of the Bank of England, and Katharine Braddick, director of financial services at the UK Treasury. The main objectives of the working group are to jointly explore the goals, use cases, opportunities and risks of the UK digital currency; provide clear guidance for the establishment of digital currency goals, and conduct a comprehensive and rigorous assessment of the overall goals; and monitor the development of international central bank digital currencies. British Chancellor of the Exchequer Rishi Sunak called the Bank of England's digital currency "Britcoin."

In addition to the UK, Federal Reserve Chairman Jerome H. Powell also reiterated in a speech at a conference on March 18 that the Federal Reserve attaches great importance to issuing digital US dollar currency. The Federal Reserve is currently working with researchers from the Massachusetts Institute of Technology (MIT) on a joint project to carefully evaluate the feasibility of the digital dollar, including the impact on the inclusiveness of the financial system and potential cybersecurity threats. Jerome H. Powell also said that the United States does not have to be the first country to use CBDC, but if it does, it must be done well. So far, the Federal Reserve is still quite cautious about developing a digital currency system led by the central bank.

European countries are also beginning to research and issue central bank digital currencies. On April 6, the Swedish Central Bank (Riksbank) said that in the next year, it will allow banks to test the digital currency e-krona proposed by the central bank to observe the performance of the currency in actual processing of commercial and retail payments. The Swedish Central Bank said that so far, the trial of e-krona has only been simulated within the Swedish Central Bank, and the scope will be expanded in the next stage to include participants such as commercial banks.

At the same time, the special report on the first phase of testing of the e-krona pilot project released by the Swedish Central Bank stated: "Distributed ledger technology (DLT) and blockchain technology provide new possibilities for e-krona, but the ability to process retail payments with the security level and scale required by central bank digital currency remains to be studied." At present, the Swedish Central Bank has not made a final decision on whether to issue digital currency and what technology to use.

Digital RMB has made rapid progress in many fields in 2021

China is one of the first countries in the world to conduct research on digital currency. The People's Bank of China officially launched research on the digital RMB (e-CNY) in 2014. Since 2020, the development of digital RMB has accelerated, and in 2021, it has made rapid progress in many fields such as retail, wholesale and cross-border payments.

At the end of 2019, the digital RMB started pilot testing in Shenzhen, Suzhou, Xiongan New Area, Chengdu and the future Winter Olympics scenarios. By October 2020, six more pilot testing areas were added: Shanghai, Hainan, Changsha, Xi'an, Qingdao and Dalian.

The increase in pilot areas has not only increased the number of people using digital RMB, but also brought about new ways to spend digital RMB. Digital RMB red envelopes, discounts, QR code payment, offline wallet payment experience, etc. have emerged in an endless stream, and the application scenarios of digital RMB have gradually covered many fields such as life payment, catering services, transportation, shopping, government services, etc.

Li Bo, deputy governor of the People's Bank of China, said at the Boao Forum for Asia on April 18 that the pilot of the digital RMB has been quite successful so far. He said that he is considering allowing more scenarios and more cities to conduct pilots, covering more usage scenarios in the pilot projects, and further strengthening the construction of the ecosystem. It is also necessary to further build the infrastructure of the digital RMB, improve the security and reliability of the system, and build a set of legal and regulatory frameworks to supervise the digital RMB business.

On April 25, the fourth Digital China Construction Summit with the theme of "Stimulating new momentum for data elements and embarking on a new journey of digital China" opened in Fuzhou City, Fujian Province. The special exhibition of digital RMB at the summit attracted a lot of attention.

JD Technology demonstrated its supply chain + scenario + technology advantages in the digital RMB pilot, and exclusively provided an immersive full experience service of digital RMB online + offline, as well as pilot applications and digital solutions for employee salary distribution and B2B enterprise payment for supply chain partners using digital RMB. Huawei demonstrated digital RMB technology solutions and new breakthroughs in scenario innovation in multiple fields such as life payment, transportation, shopping, government services, etc.

In addition to some well-known companies showcasing new technologies and new application scenarios for the digital RMB, the Digital Currency Research Institute of the People's Bank of China, together with major financial institutions such as ICBC, ABC, BOC, CCB, BOC, Postal Savings Bank of China, and Industrial Bank, jointly participated in the exhibition, showcasing a large number of the latest achievements in financial technology and digital RMB.

For example, on the basis of strictly following the basic principles of the People's Bank of China, Postal Savings Bank has created an open, shared, and intelligently interconnected digital RMB core system, and established a set of digital RMB provision, circulation, and operation systems that reflect the characteristics of Postal Savings Bank. Focusing on the three major sectors of inclusive banking, postal universal services, and local life scenarios, digital RMB is used to better serve "agriculture, rural areas, farmers, rural residents, and small and medium-sized enterprises, and provide customers with convenient, efficient, and high-quality digital RMB services. ICBC displayed a digital RMB exchange machine and a digital RMB smart machine, and staff demonstrated the two-way exchange of digital RMB and cash by scanning a QR code on ICBC's latest ATM.

International community's attention to China's digital yuan

During the Song Dynasty, when European countries were still using gold and silver coins, China had already invented and started using paper money. Today, China has once again become the leader in currency reform. While European countries have not yet decided whether to introduce digital currency, China has already launched digital RMB pilots in multiple cities, and its application scenarios have also covered multiple fields.

In an article titled "Central Banks of Various Countries Are Researching Digital Currency" published in June 2020 by Le Monde, Harvard University digital currency expert Kumar said that China's digital RMB can fight against the hegemony of the US dollar in the international payment system, such as using digital RMB to bypass the economic sanctions imposed by the United States using the hegemony of the US dollar. The article believes that this is also the reason why European central banks are researching digital currencies. For example, the central bank digital currency used by the Bank of France for interbank settlement will help strengthen the euro's international position.

The United States is also keeping a close eye on the various initiatives of China's digital RMB plan and is strengthening its review of China's digital RMB plan. Some officials in the Biden administration are worried about whether the digital RMB will have an impact on the US dollar and want to understand how the digital RMB will be distributed and whether it can also be used to bypass US sanctions; but some officials said they are not too worried about this issue. For example, Mark Sobel, the US chairman of the Forum of Official Monetary and Financial Institutions, said that China's financial system is too "fragile and weak" and does not pose a real threat to the status of the US dollar as the global reserve currency.

According to Bloomberg News, a recent report by the Director of National Intelligence of the United States pointed out that the extent to which any foreign digital currency threatens the core position of the US dollar in the global financial system will depend on the regulations it formulates. The renminbi accounts for only slightly more than 2% of global foreign exchange reserves, while the US dollar accounts for about 60%. Under China's insistence on strict capital controls, policy decisions rather than technological development are the necessary factors to promote the internationalization of the renminbi.

Li Bo, deputy governor of the People's Bank of China, once said that the current development focus of the digital RMB is to promote domestic use. The internationalization of the RMB is a natural process, but the goal of the internationalization of the RMB is not to replace the US dollar. On the contrary, its goal is to let the market make choices and further facilitate international trade and investment.