The New Currency War: Starting with Central Bank Digital Currencies

The central bank’s digital currency heading into the wind.

The New Currency War: Starting with Central Bank Digital Currencies

Digital economy is becoming an important engine to lead the global economic and social changes and promote the high-quality development of China’s economy. The central bank digital currency is the cornerstone of the development of the digital economy and the high ground for future global economic and financial competition.

Since 2020, the development momentum of global central bank digital currency has been flourishing. Several countries around the world are actively promoting the research and experiment of central bank digital currency, and the progress of China’s digital RMB has also attracted widespread attention.

Many countries in the U.S. and Europe are actively researching and promoting central bank digital currencies

A survey of central banks conducted by the Bank for International Settlements in early 2021 found that 86% of central banks are actively researching the potential of CBDC, 60% are experimenting with the technology, and 14% are deploying related pilot projects.

In terms of recent progress, the international discussion around central bank digital currencies has intensified, with a number of sovereign countries, including the U.S. and European countries, actively researching and advancing related work.

On April 19, UK time, the Bank of England and the UK Treasury announced the joint establishment of the Central Bank Digital Currency Working Group to coordinate the exploration work related to the development of central bank digital currency. The central bank digital currency will serve as a new form of digital currency issued by the Bank of England for use by households and businesses. Similar to the digital renminbi, the UK’s central bank digital currency will co-exist with cash and bank deposits, rather than replace them.

In a previously released statement on the central bank digital currency, the Bank of England also mentioned that it also mentioned 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 extensively with stakeholders about the potential benefits, risks and feasibility of introducing CBDC. At the same time, the Bank of England will also consider the impact of digital currencies on data security and user privacy.

The BOE 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 HM Treasury. The main objectives of the working group are to collaboratively explore the objectives, usage scenarios, opportunities and risks of a UK digital currency; to provide clear guidance on the objectives of setting up a digital currency and to conduct a comprehensive and rigorous assessment of the overall objectives; and to monitor the development of digital currencies in international central banks. Rishi Sunak, the UK Chancellor of the Exchequer, referred to the UK central bank digital currency as ‘Britcoin’.

In addition to the UK, Federal Reserve Chairman Jerome H. Powell also re-emphasized in a conference speech on March 18 that the Fed places a high priority on issuing a digital currency in U.S. dollars. The Fed is currently working with researchers at the Massachusetts Institute of Technology (MIT) on a joint project to carefully assess the viability of the digital dollar, including the impact on financial system inclusiveness and potential cybersecurity threats. jerome H. Powell also said that the U.S. does not have to be the first country to use CBDC, but if it is to be done it should be done well. By now, the Federal Reserve is still quite cautious about developing a digital currency system led by the central bank.

Various countries in Europe are also starting the research and issuance of central bank digital currencies. Sweden’s central bank (Riksbank) said on April 6 that it will let banks test the central bank’s proposed digital currency, e-krona, in the coming year to see how it performs when actually processing commercial and retail payments. The Riksbank said the trial of e-krona has so far only been conducted in simulations within the Riksbank, and will be expanded in the next phase to include participants such as commercial banks.

Meanwhile, the Riksbank released a special report on the first phase of testing of the e-krona pilot project, saying, “Distributed ledger technology (DLT) and blockchain technology offer new possibilities for e-krona, but the ability to handle retail payments that meet the required level of security and volume of scale for the central bank’s digital currency remains to be studied. At this time, the Riksbank has not made a final decision on whether to issue a digital currency and what technology to use.

Digital RMB to make faster progress in several areas in 2021

China was one of the first countries in the world to conduct research on digital currencies, and since 2014 the Chinese central bank has officially launched research on the digital renminbi (e-CNY). 2020 has seen the development of the digital renminbi pick up speed, and 2021 will see rapid progress in a number of areas, including retail, wholesale and cross-border payments.

At the end of 2019, the digital RMB was launched in Shenzhen, Suzhou, Xiongan New Area, Chengdu and the future Winter Olympics scenario, and by October 2020, six more pilot test areas were added in Shanghai, Hainan, Changsha, Xi’an, Qingdao and Dalian.

The increase in the number of pilot areas has brought about an increase in the number of people using digital RMB, and the “ways to spend” digital RMB are also being renovated. The number of people using digital renminbi has increased, and the number of ways to use digital renminbi has also increased. Digital renminbi red envelopes, discount offers, code payment, offline wallet payment experience, etc. The application scenarios of digital renminbi have gradually covered various fields such as payment, food service, transportation, shopping and consumption, and government services.

Li Bo, deputy governor of the People’s Bank of China, said at the Boao Forum for Asia held on April 18 that the pilot of digital RMB has been quite successful so far. He said more scenarios are being considered, as well as more cities for the pilot, to cover more usage scenarios in the pilot project and further strengthen the ecosystem. It is also necessary to further build the infrastructure of digital RMB, improve the security and reliability of the system, and build a set of legal and regulatory framework to regulate digital RMB business.

On April 25, the 4th Digital China Construction Summit with the theme of “Stimulating New Dynamic Energy of Data Elements, Opening a New Journey of Digital China” opened in Fuzhou City, Fujian Province, and the special exhibition of digital RMB in the summit attracted a lot of attention.

Among them, Jingdong Technology showcased its supply chain + scenario + technology advantages in the digital RMB pilot, and exclusively provided immersive full experience services of digital RMB online + offline, as well as pilot applications and digital solutions for employee payroll with digital RMB and B2B enterprise payment for supply chain partners. Huawei showcased digital RMB technology solutions and new breakthroughs in scenario innovation in various fields such as daily bill payment, transportation, shopping and consumption, and government services.

In addition to some well-known enterprises showcasing new technologies and scenario applications on digital RMB, the Institute of Digital Currency of the People’s Bank of China, together with major financial institutions such as ICBC, Agricultural Bank of China, Bank of China, CCB, Bank of Communications, Post and Reserve Bank and Industrial Bank, exhibited a large number of the latest achievements in financial technology and digital RMB.

For example, based on strict adherence to the basic principles of the People’s Bank of China, Post and Reserve Bank has built an open, shared and intelligent interconnected digital RMB core system, established a digital RMB provision, circulation and operation system reflecting the characteristics of Post and Reserve Bank, centered on the three major segments of the bank’s inclusive finance, universal postal services and local life scenarios, to better serve the “three rural areas”, urban and rural residents and small and medium-sized enterprises through digital RMB, and provide convenient and convenient services to customers. ICBC will provide convenient, efficient and high-quality digital RMB services to customers. ICBC displayed a digital RMB exchange machine and a digital RMB smart machine, and staff demonstrated the two-way interchange of digital RMB and cash by scanning QR codes on ICBC’s latest ATMs.

International interest in China’s digital RMB

During the Song Dynasty, when European countries were still using gold and silver minted coins, China had already invented and started using paper money. Today, China is once again leading the way in currency reform. While European countries have not yet decided whether they should introduce a digital currency, China has already enabled the pilot of the digital renminbi in several cities digital, and its application scenarios cover a wide range of areas.

In an article published by French newspaper Le Monde in June 2020 titled “Central banks are working on digital currencies,” Kumar, a digital currency expert at Harvard University, said that China’s digital yuan could counter the hegemony of the U.S. dollar in the international payment system, for example by using the digital yuan to bypass economic sanctions imposed by the U.S. using the hegemony of the U.S. dollar. The article argues that this is why European central banks are studying digital currencies, such as the central bank digital currency used for interbank settlements at Banque de France, which would help strengthen the euro’s position in the international arena.

The U.S. is also keeping tabs on the various initiatives of China’s digital renminbi program and is stepping up its scrutiny of the country’s digital renminbi program. Some officials in the Biden administration are concerned about whether the digital yuan will impact the U.S. dollar and want to know how it will be distributed and whether it can also be used to bypass U.S. sanctions; however, some officials say they are not too worried about the issue, such as Mark Sobel, the U.S. president of the Forum of Official Monetary and Financial Institutions, who said China’s financial system is too “fragile and weak” for the U.S. dollar as a global reserve currency. For example, Mark Sobel, the U.S. president of the official monetary and financial body Forum, said China’s financial system is too “weak” to pose a real threat to the dollar’s status as a global reserve currency.

And according to a recent report by the U.S. Director of National Intelligence, the extent to which any foreign digital currency threatens the U.S. dollar’s central position in the global financial system will depend on the regulatory requirements it sets, according to Bloomberg News. The renminbi accounts for just over 2 percent of the global foreign exchange deposit base, compared to about 60 percent for the U.S. dollar. With China’s insistence on strict capital controls, policy decisions rather than technological developments are the necessary factors to drive the internationalization of the RMB.

Li Bo, deputy governor of the People’s Bank of China, has said that the current focus of the development of the digital yuan is to promote domestic use. The internationalization of the RMB is a natural process, but the goal of RMB internationalization is not to replace the US dollar; rather, the goal is to allow the market to make choices and further facilitate international trade and investment.

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