The central bank plans to launch a legal digital currency to replace some cash

Yi Gang, governor of the People's Bank of China, responded to hot financial issues at a press conference held at the news center for the celebration of the 70th anniversary of the founding of the People's Republic of China on September 24. On the issue of central bank digital currency, Yi Gang said that the central bank adheres to centralized management and does not pre-set technical routes in research and development work. It can compete fairly in the market and select the best. It can consider blockchain technology or adopt new technologies evolved on the basis of existing electronic payments to fully mobilize the enthusiasm and creativity of the market.

On August 20, China Daily reported that China's central bank digital currency (Editor's note: Central Bank Digital Currency, abbreviated as CBDC) may be issued earlier than Facebook's global digital cryptocurrency Libra. Earlier, at the China Finance 40 Forum held on August 10, Mu Changchun, deputy director of the Payment and Settlement Department of the People's Bank of China, said that the central bank's digital currency will be launched soon.

As early as 2014, the central bank started research on cryptocurrency. Now, after five years, the digital currency of the Central Bank of China is about to be launched, which will undoubtedly bring about a major change in the monetary system.

Central bank digital currency, digitized legal tender

CBDC is completely different from the concept of decentralized cryptocurrency. It is a centralized digital currency backed by the government and adopts a two-tier operating system - that is, the People's Bank of China first exchanges the digital currency to banks or other operating institutions, and then these institutions exchange it to the public.

A chart produced by Binance Research, an organization founded by cryptocurrency exchange Binance, shows the two-tiered operational process of CBDC.

“Even though CBDC is very likely to adopt blockchain technology, it is still very different from decentralized cryptocurrencies such as Bitcoin and Ethereum,” Mao Zhihong, founder and CEO of ArcBlock, told PingWest. ArcBlock was founded in 2017 and is a blockchain technology company headquartered in Seattle, USA.

CBDC is a form of sovereign digital currency. The CBDC that the People's Bank of China plans to launch is essentially a digital version of the legal tender RMB, which will be exchanged for legal tender reserves (M0) at a 1:1 ratio.

"From the perspective of the central bank, no matter whether you are using blockchain or a centralized account system, electronic payment or so-called mobile currency, the central bank can adapt to any technical route you take. Of course, your technical route must meet our threshold. For example, because it is aimed at retail, it must at least meet high concurrency requirements and reach at least 300,000 transactions per second." Mu Changchun said at the meeting.

"The introduction of CBDCs will allow the central bank to reduce the need to print banknotes. In other words, part of the money that should have been printed will be distributed digitally to commercial banks," a senior manager surnamed Li at a state-owned fintech company told PingWest. He added: "The two-tier operating system can not only mobilize the enthusiasm of commercial banks, but also increase everyone's acceptance of digital currencies."

This was confirmed by Yi Gang, who said at a press conference that the People's Bank of China will combine digital currency and electronic payment tools and launch a package with the goal of replacing part of the cash.

As a theoretically costless medium of exchange, CBDC will be able to improve the efficiency of the payment system. At the same time, in the case of cross-border financial transactions, CBDC can facilitate faster and more secure settlements and allow for more innovation in the field of digital financial services. In addition, the introduction of CBDC will also help combat counterfeit money, as each token and transaction will need to be cryptographically verified in real time by a centralized system.

Cryptocurrencies such as Bitcoin and Ethereum use a distributed accounting system to make every transaction anonymous and public. As a centralized digital currency, CBDC removes the anonymity function, and industry insiders believe that its purpose is to reduce the occurrence of money laundering. "Under this mechanism, every transaction can be tracked," said Mao Zhihong.

In addition, Manager Li also told PingWest that digital currency can be easily split. Theoretically, it can be split into countless decimal places, which is impossible with paper currency.

The industry generally believes that China is likely to be the first country to issue a sovereign digital currency, so every move of the central bank affects the nerves of industry insiders.

Some people believe that at this point in time, the central bank’s frequent statements on the issue of CBDC are an attempt to reduce the financial system’s dependence on the US dollar, and hope to improve the status of the RMB in international settlements through this channel.

However, both Mao Zhihong and Manager Li believe that the launch of the central bank’s digital currency has no direct relationship with reducing the reliance on the US dollar in the global financial system. Manager Li said: “Although the central bank has mentioned the issuance of digital currency many times during the trade war, the independence of the RMB depends on the recognition of the world’s assets for the RMB, and has nothing to do with whether it is in the form of digital currency or paper currency.”

On August 27, Forbes reported that Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, Alibaba, Tencent and UnionPay will receive the first batch of central bank digital currency issued by the People's Bank of China on "Double Eleven". However, on August 28, an unnamed insider of the People's Bank of China told Tencent News that Forbes' information on the issuance date of the central bank digital currency and the institutions involved was inaccurate, but he did not disclose the exact news.

Improve the current situation where commercial banks are crushed by third-party mobile payment platforms

Thanks to WeChat Pay and Alipay, China has already entered a cashless society. However, these two mobile payment tools still cannot bypass the banking system, and they need to be bound to bank cards to operate smoothly. The launch of the central bank's digital currency will bring considerable challenges to these mobile payment tools.

Cindy Wang, an analyst at DBS Bank, Singapore’s largest commercial bank, told the South China Morning Post: “Commercial banks are under deposit pressure, and third-party payment platforms such as Alipay and WeChat Pay allow people to transfer idle funds in their bank accounts from the banking system to their own platforms.”

The two-tier system of digital currency designed by the PBOC provides crucial assistance to commercial banks as it designates them as agents for conversion between CBDC and traditional fiat currencies, leaving room for these banks to ensure that the funds remain in their hands as deposits.

This will greatly improve the position of commercial banks, which have long been under pressure from WeChat Pay and Alipay.

"In the field of cryptocurrency, there is a great need for a stable digital currency, which is why USDT was created (Editor's note: Tether USD (USDT for short), a token based on the stable value currency USD (USD) launched by Tether, 1 USDT = 1 USD). If the People's Bank of China adopts an open attitude to issue central bank digital currency, it may meet the demand for stable currency in this field." Mao Zhihong told PingWest.

China is at the forefront of the world in financial technology innovation. It has not only become the world's largest mobile payment market, but also a leader in peer-to-peer financial services (including loans, payments, etc.).

Mao Zhihong said: "China has always maintained a positive attitude towards financial technology innovation. This is also an inevitable trend of social and technological development. The digital currency of the People's Bank of China is crucial to the future development of the digital economy. Although the US financial regulatory system is relatively mature, it may hinder the speed of innovation, causing it to lag behind China in digital currency."

Yi Gang said at the press conference that if digital currency is to be used across borders, it must also meet regulatory requirements such as anti-money laundering, anti-terrorist financing, and anti-tax havens. At present, the central bank's digital currency still needs to go through a series of research, testing, evaluation, and risk prevention, and there is no timetable for its launch. (PingWest)