China’s central bank digital currency (CBDC) is needed as a ‘back-up’ for the country’s retail payments system and will co-exist with the country’s dominant private technology platforms, the director-general of the Digital Currency Institute of the People’s Bank of China (PBoC) said this week.
Mu Changchun was part of a panel discussion on ‘Navigating the uncharted waters of retail CBDC’ during the closing day of the Bank for International Settlements (BIS) Innovation Summit 2021 conference.
China is at an advanced stage of developing its CBDC, known as the e-CNY or ‘digital yuan’, and its officials’ pronouncements on the topic are watched closely given the country’s size and international significance.
The domination of China’s retail mobile payments market by two companies, Alipay and Tenpay/WeChat Pay, is among the main reasons for the PBoC’s enthusiasm for a retail CBDC, Mu said. He also cited a need to protect the country’s monetary sovereignty, particularly from the “threat” of crypto-assets; a desire to improve the central bank’s payment system’s efficiency; and to boost financial inclusion.
“People go out without physical wallets, only with their mobile phones, they are so important,” Mu said, of the Chinese tech giants. But he continued: “If something bad happened to them either financially or technically, that would definitely bring negative impact on the financial stability of China, so in order to provide a back-up for the retail payments system, the central bank has to step up and provide a CBDC service.”
Cross-border CBDC ‘principles’ proposed
China is one of a growing number of major nations involved in CBDC research collaborations in the cross-border space and Mu also used the session to propose several global ‘values’ or ‘principles’ for cross-border CBDC payments, emphasising the importance of inter-operability between different jurisdictions’ digital currency systems.
“Our [CBDC] project is to protect or safeguard monetary sovereignty. [Most] monetary authorities or central banks would like to do the same to avoid dollarisation,” he said, introducing his suggestions. “So, I would like to propose some key values in making cross-border payments with digital fiat currency or CBDC.”
“Firstly, the CBDC or digital fiat currency supplied by a central bank should continue supporting the healthy evolution and financial stability of the international monetary system,” he told the online audience, adding that a digital currency supplied by one central bank “should not impede another central bank’s ability to carry out its mandate for monetary and financial stability.”
He then focused on regulatory compliance issues. “Cross-border payment arrangements with CBDC should comply with the regulations and the laws of jurisdictions concerned, such as capital management and foreign-exchange mechanisms,” Mu said, going on to say that “information flow and fund flows should be synchronised so as to facilitate regulators to monitor the transactions for compliance” and that “arrangements with CBDC should improve the transparency in cross-border e-commerce and help to address the regulatory pain-points in AML [anti-money laundering]/CFT [combating the financing of terrorism], custom and tax declarations, and capital management.”
He also called for the creation of a “scalable” foreign exchange trade platform, supported by digital-ledger technology “or other technologies”.
‘Every merchant has to accept our retail CBDC’
China’s CBDC has yet to officially launch but Mu said that a retail CBDC “has already become the digital version of legal tender, which means that every merchant has to accept our retail CBDC.”
It has a ‘two-tier’ operational system: tier one is the central bank, which issues the retail digital currency to the second tier of ‘authorised operators’, which comprises commercial banks, payment service providers (PSPs), telecoms operators and other private-sector financial institutions. The second tier, which then issues or exchanges the digital currency with citizens, is also in charge of know-your-customer (KYC) checks.
Mu said it had been “very valuable” to “incorporate or co-operate with” the private sector during pilot projects, also referencing “chip-makers, mobile-phone makers and AI [artificial intelligence] companies”, adding that “in fact, every section of society has joined construction of the system.”
In terms of financial inclusion, citizens will be able to open a CBDC digital wallet with a mobile-phone number but without needing to have a traditional bank account, while ‘dual offline’ functionality will help citizens lacking reliable network coverage. Mu added that a “user-friendly” app and “display cards with QR [Quick Response] codes” would help citizens who struggle with technology.
Bahamas looks into age-old question
John Rolle, governor of the Central Bank of the Bahamas – which launched the first fully deployed digital version of a fiat currency six months ago – was also a panellist at the session. He outlined how the country’s ‘Sand Dollar’ was also designed to help address financial inclusion challenges; to help during a response to any future natural disasters (“so government can provide social assistance electronically if necessary”); and offered “an opportunity to address inter-operability challenges that are typical when you have private mobile-payment providers.”
Although the Sand Dollar is live, it is not yet the finished article. “[An] interesting side of the design that we continue to work on is that in the cash world there is no distinction between minors and [older] people having access to payments,” he said. “That is a very current focus, making sure we address the privacy, consumer protection and all the other issues that relate to having persons along the entire age spectrum participate in the digital space because we know that we cannot afford to have any form of exclusion based on age.”
Rolle also touched on the cross-border question, saying: “We believe that anyone who has a mobile wallet will ultimately only value the convenience of it if they can make cross-border payments.”
Sweden’s parliamentarians weigh up the possibilities
Sveriges Riksbank senior adviser Hanna Armelius provided a perspective from Sweden, where the central bank’s initial trigger to investigate CBDC was because of the country’s well-documented decline in cash use.
The Riksbank has been working with Accenture to investigate the technical side of a potential e-krona.
“We have been looking at possible problems that a CBDC may cause and possible problems if we don’t have a CBDC,” she said, saying that the ball was in the Swedish Parliament’s court to look into the legalities of issuing a CBDC and whether indeed “they [politicians] feel it would be a good idea”.
“We are sort of leaning probably towards a model where the public and private sector has a partnership,” she said, adding: “We have noticed that we probably need some tools to be able to influence demand. If we are going to supply money to the economy we have to have some sort of tool to perhaps limit the uptake to make sure we don’t cause any types of troubles for financial stability, for instance.”
The panel discussion was moderated by Massachusetts Institute of Technology (MIT) Digital Currency Initiative director Neha Narula, also also featured Kristine Braden of Citigroup Global Markets Europe.
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BIS INNOVATION SUMMIT: FURTHER READING
Global Government Fintech’s news report from the ‘Fast, cheaper cross-border payments: is wholesale CBDC the answer?’ session, which featured speakers including Bank of England deputy governor Sir Jon Cunliffe
Global Government Fintech’s news report from the ‘How can central banks innovate in the digital age?’ session, which featured US Federal Reserve chairman Jerome Powell, Deutsche Bundesbank president Jens Weidmann and BIS’s own general manager, Agustín Carstens