The People’s Political Consultative Conference: Talking about “digital currency”

The development and piloting of digital currency is certainly beneficial to the internationalization of RMB, but it should not be overestimated in the short term.

The People's Political Consultative Conference: Talking about "digital currency"

The “14th Five-Year Plan” and the outline of the 2035 Visionary Goals propose to “steadily promote the research and development of digital currency”, which shows the positive and prudent attitude towards digital RMB. China’s huge consumer market and rich consumer scenarios will provide important support for the promotion of digital RMB.

Digital currency implies a more convenient, efficient and low-cost payment option. From the pilot, digital RMB can be used without paying any services, fees and charges, without binding bank cards, and can still be used normally without network. By interconnecting cell phones, smart cards and even wearable devices with the app, Digital RMB supports a variety of offline payment methods and is available for both offline and online purchases. From “swipe” to “touch”, the digital RMB improves the convenience of payment, especially for seniors who are not good at using the Internet. In addition, as a purely public good, digital RMB can help enhance the inclusiveness of financial services. For example, people in some rural areas and remote mountainous regions can enjoy financial services such as payments through digital wallets even if they do not have bank accounts.

In addition to being more convenient to use, digital RMB is also important in areas such as anti-money laundering and anti-terrorist financing. Unlike cash, which is used completely anonymously, and traditional mobile payments, which are tied to real-name bank accounts, digital RMB is controlled and anonymous, i.e., it insists on “anonymity for small amounts and traceability for large amounts” and is anonymous on the basis of controlled risk. This not only helps protect user privacy, but also facilitates the monitoring and tracking of illegal and criminal acts such as telecom fraud, money laundering, terrorist financing and tax evasion, thus maintaining financial security and better protecting the legitimate rights and interests of the people. In addition, digital RMB also has great potential in cross-border trade and cross-border settlement, and can provide a boost to enhance the international status of RMB and promote RMB internationalization.

The most important question for ordinary users is, what are the benefits of using digital RMB for themselves? The digital RMB is real “money”, while Alipay and WeChat are “wallets”, as they require a bank account. In some places, merchants may refuse Alipay and WeChat payments, but no merchant can refuse to use digital RMB. While WeChat and Alipay require a network connection to pay, digital RMB does not, as two phones can “touch” each other to make payments offline. This shows the overall advantage of digital RMB over existing third-party payments.

The main carrier of digital RMB is smartphones. The penetration rate of smartphones in China is about 60%, and the penetration rate of smartphones in some remote areas is low. Even in some large and medium-sized cities, many elderly people do not know how to use complex smartphones, making it difficult for digital RMB to fully replace cash.

The digital wallets currently being piloted are divided into two forms: software wallets, which are mobile apps, and hardware wallets, which store digital RMB on smart cards, meaning that you can use digital RMB without a cell phone. But even hardware wallets are complicated for many seniors, making it difficult to fully replace traditional cash spending habits.

To summarize, there are five differences between digital currency and bitcoin: First, the legal status is different. Bitcoin is characterized as a special commodity in China; the central bank’s digital currency is legal tender and has a national credit backing. Second, the nature is different. Bitcoin is decentralized; the central bank’s digital currency is centralized currency. Third, the issuance volume is different. The total number of bitcoin is limited to 21 million; the number of central bank digital currency is determined by the central bank depending on the circulation of the market currency. Fourth, the circulation scope is different. Bitcoin is circulated worldwide; the central bank digital currency is only circulated in China for the time being. Fifth, the value is different. The value of bitcoin fluctuates more with market transactions; the central bank’s digital currency is a digital RMB, so its value is basically stable.

The People’s Bank of China and other seven ministries jointly issued the “Announcement on Preventing the Risk of Token Issuance and Financing”, pointing out that “virtual currencies” are not legal tender (fiat currency) issued by the monetary authority, but are essentially a specific virtual commodity. Therefore, speculation, network fund-raising, lending and financing through the monetary properties of “virtual currency” carries great legal and economic risks.

The digital RMB will change the financial landscape. Firstly, adding digital RMB to the legal tender will change the payment market, and secondly, it will add an official payment instrument to the retail market where market-based payment instruments are dominant.

The digital RMB will also change the landscape of banking competition and money market regulation. For example, once financial consumers are less dependent on bank accounts, they will be freer to choose their financial services and financial institutions, and financial competition will become more adequate. And the central bank has real-time, complete and structured data on the circulation of the central bank’s digital currency, which is conducive to the precise regulation of the total money supply.

The introduction of digital currency aims to be based on the modernization of the domestic payment system, keeping pace with the digital economy and the Internet era, improving efficiency and reducing costs, especially for the retail payment system, and its purpose and direction is not to replace the reserve currency status of the U.S. dollar and the status of international payment currency.

However, internationally, the central bank digital currency is a digital form of central bank liabilities, which naturally reduces the credit risk and liquidity risk exposure of settlement compared to the currency in the deposit system of commercial banks, and can effectively solve the pain points of coupon payments against and cross-border payments in the traditional financial system. The de-intermediation of cross-border transactions can bypass the dollar-based SWIFT system, which protects the sovereignty of monetarily weak countries and helps achieve harmonious international trade cooperation.

The development and piloting of digital currency is certainly beneficial to the internationalization of RMB, but it cannot be overestimated in the short term. The internationalization of the RMB will not be achieved by launching a digital RMB. The internationalization of the RMB ultimately depends on institutional and policy choices, on China’s comprehensive strength, technological competitiveness, including economic volume, trade scale, currency security and liquidity, financial relevance, and geopolitical factors. In addition, the external effects reinforced by the synergy of different functions of the currency can also affect its international use. The practical actions of various countries show that the RMB has become more and more weighty in the international arena. To date, 29 countries have shifted to the RMB in trade settlements.

Globally, 86% of central banks are actively studying the potential of central bank digital currencies, 60% are experimenting with the technology, and 14% are deploying pilot projects. Russia’s “de-dollarization” has accelerated in recent years. Russia has reduced its dependence on the U.S. dollar by selling U.S. debt, establishing a local settlement system, joining the INSTEX (Instrument to Support Trade Swaps) set up by the UK, Germany and France, and promoting settlement in non-U.S. currencies. Elvira Nabiullina, president of the Bank of Russia, reportedly said that the bank plans to start testing digital rubles in 2022, given the huge demand for digital currencies in the country. She said Russia is currently working to launch a digital ruble to facilitate payments for local businesses or individuals and to get more countries internationally to recognize the ruble and help boost the internationalization level of the local currency amid the West’s ongoing crackdown on the country.

Federal Reserve Governor Lael Brainard said digital currencies will likely have a major impact on the global financial system, and the U.S. should quickly take a leading role in this area to strengthen the dollar’s role as a global reserve currency.

Digital currencies have opened up a new track for global monetary “ascension competition”. Looking ahead, the multilateral central bank digital currency bridge may become an important form of international digital currency system. In this context, how to enhance the competitiveness of RMB in the global monetary system and give play to the first-mover advantage of central bank digital currency is a major issue that needs to be solved in the monetary and financial field in China.

Author: Zhang Lianqi, Standing Committee Member of the National Committee of the Chinese People’s Political Consultative Conference, senior accounting, auditing and taxation expert

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