Lu Xiaoli: The Inevitable Trend of the Central Bank’s CryptoCurrency Fintech Era

Nowadays, many central banks are exploring central bank digital currencies (CBDC), and central banks are moving from pure conceptual research to a more advanced stage of pilot testing. The Bank for International Settlements survey report on global central banks in 2021 shows that in 65 countries or economies around the world, about 86% of central banks are actively carrying out central bank digital currency work (Figure 1); from the perspective of the content of CDBC, about 60% % Of central banks (42% in 2019) are conducting proof of concept for CDBC, and 14% of central banks are already promoting CDBC pilot work (Figure 2).

Figure 1 The proportion of global central banks carrying out CDBC work

Lu Xiaoli: The Inevitable Trend of the Central Bank's CryptoCurrency Fintech Era

Source: Bank for International Settlements

Figure 2 Contents of CDBC work carried out by global central banks

Lu Xiaoli: The Inevitable Trend of the Central Bank's CryptoCurrency Fintech Era

Source: Bank for International Settlements

The development of CBDC is the application and extension of digital technology in the financial field. On the one hand, its thrust comes from the country’s pursuit of inclusive financial services and improving payment efficiency; on the other hand, it also comes from countries’ safeguarding the legal status of sovereign currencies and competing for strategic commanding heights. In particular , the rise of cryptocurrencies such as Libra has caused tension in the entire currency and financial world. From large technology companies such as Facebook to traditional financial institutions such as Morgan Sachs and Goldman Sachs, they have begun to get involved in cryptocurrencies, which has also forced countries to focus on researching their own digital currencies.

China’s central bank’s digital currency progress is ahead of other major countries. As early as 2014, on the advice of Governor Zhou Xiaochuan, the central bank’s digital currency research and development work was initiated. In July 2021, the “White Paper on China’s Digital RMB R&D Progress” was released. So far, several rounds of digital renminbi pilot projects have been carried out, with usage scenarios covering various fields such as life payment, catering services, transportation, shopping and consumption, and government services.

Lu Xiaoli: The Inevitable Trend of the Central Bank's CryptoCurrency Fintech Era

Table: Initiatives of major central banks in the world to carry out CDBC

Lu Xiaoli: The Inevitable Trend of the Central Bank's CryptoCurrency Fintech Era

The Bank for International Settlements (BIS) believes that CBDC is an important opportunity for the currency system. It can contribute to the construction of an open, safe and competitive currency system that can support innovation and serve the public interest, and help to improve payment efficiency in an all-round way. And inclusive finance; but there are also potential risks such as data security, which may affect the stability of the financial system and currency implementation.

Weighing the opportunities and risks that CDBC may face when it launches is an important challenge faced by central banks from a practical and technical point of view. But what is generally accepted by central banks in various countries is that CDBC is the general trend.

# CDBC is legal currency based on national credit, virtual currency is just speculative assets

The evolution of currency forms is proceeding simultaneously with the level of social economy and technology. Historically, currency forms have been manifested as physical currency, financial coins and credit notes. Under the modern monetary system, the basis of credit banknotes is the trust in national sovereignty and national credit behind the currency. In this system, the central bank provides banks with the final means of payment (bank reserves), and also provides the public with a convenient and visible means of payment (cash).

CBDC is fundamentally different from other virtual currencies. CBDC is legal tender, based on national sovereignty and national credit. The development of CBDC is the application and extension of digital technology in the financial field, and the evolutionary form of currency brought about by the development of a new generation of information technology such as blockchain.

Other virtual currencies, as a type of virtual assets issued by the private sector, are speculative assets rather than currencies. They are not endorsed by national credit, and do not have any attributes and characteristics of public products, and are often used in financial crimes such as money laundering. For example , the mining behavior of Bitcoin causes serious energy loss and does not have social welfare; although stablecoins claim to be linked to real currencies to gain credibility, they are essentially just an appendage of the traditional currency system.

CDBC is the general trend and the inevitable result of technology in the financial field

In recent years, with the rapid development of artificial intelligence, big data, cloud storage, blockchain and other technologies, and continuous penetration into the financial field, the efficiency and inclusiveness of financial services have been greatly improved. At the same time, it has also promoted the exploration of the digital form of legal tender by the central bank or the monetary authority.

Improve payment efficiency.

The area most affected and impacted by technological development is the retail payment field. In the era of the digital economy, the general public has increasing demands for convenience, security, inclusiveness, and privacy in retail payments, and the people in underdeveloped and remote areas have increasingly strong demands for online financial services. In terms of payment methods, the demand for cash transactions is declining, and the demand for digital payments is increasing day by day. According to the China Payment Journal Survey conducted by the People’s Bank of China in 2019, the number and amount of mobile payment transactions accounted for 66% and 59% of the total. .

Digital currency reduces payment costs, improves payment speed, and improves payment convenience, thereby greatly improving payment efficiency.

Promote financial inclusion.

Digital payment services require a certain cost to obtain. Although the accelerating technological progress over the past few decades has greatly reduced the price of communication equipment, the cost of traditional digital payment methods such as bank cards is still very high. It is difficult for most low-income groups to truly enjoy payment services in the digital age. According to BIS, in many countries, even in developed economies, a large proportion of adults still cannot choose digital payment to participate in e-commerce and accept government transfers because they do not have payment cards and smart phones.

Marx once said that “money is not a thing, but a social relationship.” As a public product provided by the central bank, CDBC can provide all participants with a fair market environment and access to equal financial services; it can reduce the cost of providing financial services, help the public to obtain financial services fairly, and truly realize financial services. Pratt & Whitney.

The official launch of CBDC will take time, and cross-border settlement requires cooperation and exploration by global central banks

The monetary system is an important component of a country’s financial system and is of great significance to maintaining the country’s financial security and stability. Therefore, the introduction of the central bank’s digital currency should comprehensively consider the actual situation of each country, and be cautious.

At present, central bank digital currencies of various countries are still conducting multiple rounds of pilots and tests. In this process, problems are discovered and potential risks are found, so as to debug and upgrade at the technical level, and adjust and reform at the institutional level.

Lu Xiaoli: The Inevitable Trend of the Central Bank's CryptoCurrency Fintech Era

As the legal tender issued by the central bank, cross-border payment and settlement will become an important exploration direction for CBDC. With the deepening of the globalization process, the demand for cross-border retail payment services is also rising. CDBC helps to achieve faster, cheaper, more transparent and more inclusive cross-border payment services for global citizens, enterprises and The country brings convenience.

However, most central banks still have reservations about this. The main reasons are: First, the acceptance of foreign currency CBDC will have a substitution effect on the local currency, which may increase the risk of local banking departments and currency runs. Second, the cross-border use of CBDC will aggravate financial market volatility and endanger the realization of the functions of some central bank systems to maintain currency and financial stability. Third, cross-border settlement is not a purely technical issue, it also requires cooperation and coordination among settlement countries in policies and systems such as foreign exchange management.

In September 2021, the Bank for International Settlements (BIS) and the People’s Bank of China Digital Currency Research Institute, the Hong Kong Monetary Authority, the Bank of Thailand and the UAE Central Bank jointly released the first phase of the multilateral central bank digital currency bridge research project (m-CBDC Bridge) According to the report, on the m-CBDC Bridge public platform, a variety of official digital currencies can complete international transfers and foreign exchange operations within a few seconds, saving nearly half of the cost.

We believe that various levels of cooperation among central banks in establishing common standards, establishing international infrastructure, and rules and systems can help CDBC find feasible paths and solutions in the field of cross-border payment and settlement.

Lu Xiaoli

China (Shenzhen) Comprehensive Development Research Institute, China Pass Digital Economy Research Center, PhD in Finance, Postdoctoral in Theoretical Economics.

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