“Central bank digital currencies (CBDCs), be it wholesale or general purpose, has been high on the agenda of the central banking community,” said Howard Lee, Deputy Chief Executive, Hong Kong Monetary Authority, in a speech in March. “Apart from being a new and trusted digital means of payment, CBDCs could potentially also foster competition and innovation in the payment sector.”
Indeed, over 80 percent of 66 central banks around the globe are exploring the use of CBDCs, according to the Bank for International Settlements statistics. These 66 countries cover 75 percent of the world’s population and 90 percent of economic outputs. However, none have fully launched yet.
One CBDC initiative taking place is the roll out of the e-CNY, or digital yuan, issued by the People’s Bank of China (PBOC), which has so far initiated pilot programmes in certain cities around Mainland China. After the official roll out, which is expected to happen in 2022, the digital currency will likely bring major changes to China’s digital payment sector.
What is e-CNY?
E-CNY is a sovereign digital currency issued by the PBOC. Its value will be as stable as the physical yuan, and is designed to replace money in circulation (known in central banking parlance as M0).
Commercial banks and electronic payment companies would deposit 100 percent worth of reserves at the central bank in exchange for digital currency, which it then distributes to retail users. The e-CNY will adopt a two-tier structure, according to the PBOC. In the first tier, the PBOC will issue e-CNY to authorized agencies, including the six largest state-owned banks and non-financial institutions Tencent and UnionPay. In the second tier, the authorized agencies will distribute to end users such as companies and individuals. Instead of using bank accounts, e-CNY will be stored through electronic wallets that can transfer e-CNY without access to the Internet. While there’s no official white paper published by the PBOC on the e-CNY infrastructure yet, the PBOC has called its privacy protection feature “controllable anonymity.” This means that e-CNY offers better personal information protection, yet still keeps sufficient records for tracing illegal activities, such as money laundering, tax evasion and terrorist financing.
E-CNY can be seen as a digital payment that has equivalent value to other forms of the yuan, such as bills and coins. It can be transferred without relying on a bank account. During a transaction, it simply verifies the value of e-CNY, instead of verifying the account holder’s identity. Compared with consumer bank deposits, the biggest difference is that holding e-CNY in a digital wallet won’t accrue any interest.
Based on these features, we can understand e-CNY as simply an electronic version of cash. The central bank’s role is mainly to make changes to the currency’s physical form, distribution and payment framework.
The impacts of e-CNY
E-CNY will bring positive changes to the operation of traditional commercial banks. It can conduct end-to-end value transfer without bank accounts, reducing dependence on financial intermediaries and achieving “controllable anonymity.” It may even boost earning potential for commercial banks since they, as the operator of mobile wallets of e-CNY, can offer some other value-added services.
In the long-run, commercial banks will be able to leverage technologies such as blockchain, biometric identification and big data to manage customers’ financial data, driving further innovation in the financial industry.
E-CNY will bring challenges to third-party payment agencies. China’s popular digital payment platforms WeChat Pay and Alipay feature low costs and convenience, all of which can be achieved by using e-CNY. Although the current costs for mobile payment is very low, the central bank has said that payments and transactions in the future should be free of charge.
The central bank’s digital currency can be put in the mobile wallets of PBOC and commercial banks. When the central bank’s digital currency is officially launched, it could potentially occupy the current market share of third-party payments.
Since the e-CNY aims to replace physical cash in circulation in the short-term, its impact on the RMB exchange rate will be minimal, given that digital payments are already prevalent in China. In the long-run, as e-CNY helps to advance the internationalization of the RMB, the RMB may appreciate given higher external demand, especially against currencies of countries along the Belt and Road initiative. However, since it will be easier for the central bank to monitor the two-way capital flow under the e-CNY, the PBOC is unlikely to allow sustained volatility in either direction.
E-CNY could promote the internationalization of RMB, especially in the areas where its economic growth is highly dependent on trade with China. E-CNY’s peer-to-peer transactions could help to reduce cross-border settlement costs and remove the restrictions levied by correspondent banks with disparate systems. The adoption of CBDCs in other countries could further increase the convertibility between e-CNY and other currencies while bypassing correspondent banks.
Kera Kong was a speaker in the Mainland Business Interest Group’s webinar “Digital RMB.” A recording of the webinar is available for members on the Institute’s website.