China People’s Daily: Global digital currency accelerates R&D

As far as countries are concerned, digital currency evolution shows 3 paths, namely private crypto digital currency, private stable coin, and central bank legal digital currency (CBDC).

China People's Daily: Global digital currency accelerates R&D

Recently, the European Central Bank announced the results of a six-month consultation case on the digital euro, actively preparing for the issuance of the digital euro, and the Bank of Japan has also officially launched a digital currency trial. Digital currency research and development is showing an accelerated trend.

As the trend of digitalization continues to expand, the economic operation model, social division of labor structure, and industrial organization boundaries gradually change, which will reconfigure the financial service model from the demand side and have a profound impact on the financial infrastructure. The digitalization of money and payment is one of its core elements. From the perspective of each country, the evolution of digital currency shows 3 paths, namely private crypto digital currency, private stable coin, and central bank legal digital currency (CBDC).

Private crypto-digital currencies are based on digital principles and generated by specific algorithms, such as Bitcoin and Ether. Stable coins are issued by private organizations and have a price stabilization mechanism, which has a certain “quasi-public nature” and is still essentially a private crypto digital currency, such as the digital currency launched by Facebook.

The most “public good” is the central bank legal tender, which is classified by the Bank for International Settlements as retail and wholesale. Among them, retail CBDCs can be divided into account-based and pass-through (negotiable cryptographic digital proof) based types, which are issued to all individuals and companies and can be widely used for small retail transactions; wholesale CBDCs are pass-through based, for large financial institutions such as banks, and are used to settle large transactions between financial institutions. Thus, the former is essentially digital cash, while the latter is an innovative payment clearing model. Currently, most CBDCs from central banks are still in the research or testing stage, and very few countries have already landed issuance.

Generally speaking, the basic functions of money include a measure of value, a means of circulation, a means of payment, a means of storage, and so on. In this regard, private cryptocurrencies have weak “monetary attributes” and are more of an “alternative asset”, most of which are considered to be risky as they are not yet regulated. CBDCs, on the other hand, are more than simply “digitizing” fiat currency, but rather attempting to embed distributed accounts or other non-traditional technologies into them. From an objective point of view, the convenience of retail payments has been increasing in recent years, and many central banks have made significant progress in building fast payment systems, so CBDC may only serve as a complementary means of payment in the short term.

Can digital currency be used for cross-border payments in the future? For example, the People’s Bank of China has jointly launched a research project on “Multilateral Central Bank Digital Currency Bridge” with the Bank of Thailand and the UAE Central Bank to explore the application of CBDC in cross-border payments. However, considering the differences in technology, rules and regulatory standards among countries, it is not easy to resolve the interoperability of payment systems in the short term.

China’s CBDC has features such as two-tier operation and controlled anonymity, and relevant innovation attempts are at the forefront of the world. In the future, it is expected to focus more on complementing the domestic retail payment system, taking into account cross-border retail payment exploration. In addition, international organizations can also be relied upon to develop cross-central bank cooperation, such as building on the existing Special Drawing Rights (SDR) of the International Monetary Fund to create a digital RMB participation, new technology-supported eSDR or dSDR.

A journey of a thousand miles begins with a single step. From accounts to pass-throughs, domestic to cross-border, retail to wholesale, payments to trade and investment, etc., a test in the present will lay a solid foundation for future currency innovation and market choice.

The author is Yang Tao, Researcher, Institute of Finance, Chinese Academy of Social Sciences

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