In an update on its central bank digital currency (CBDC) plans, the People’s Bank of China (PBoC) has said its digital yuan is ‘technically ready’ for cross-border use.
The central bank is at an advanced stage of developing its digital currency, officially known as the e-CNY, and its statements on the topic are watched closely given the country’s size and international significance.
Its CBDC is designed ‘mainly for domestic retail payments at present’, the PBoC said in a white paper, issued ‘to clarify the PBoC’s position [and] to explain the background, objectives and visions, design framework and policy considerations for the e-CNY system’.
The publication was issued in the same week that the European Central Bank gave the green light to a multi-year project to explore the creation of a digital version of the euro and also that US Federal Reserve chair Jerome Powell told the Senate banking committee that he was “legitimately undecided” on whether the benefits outweigh the costs or vice versa of a potential digital dollar.
The PBoC said in its white paper that ‘e-CNY has been applied in over 1.32 million scenarios’ as of 30 June. More than 20.87 million personal wallets and more than 3.51 million corporate wallets had been opened, with transaction value approximating RMB34.5 billion (£3.9 billion). While the central bank said it will continue to ‘prudently advance the pilot e-CNY R&D project’ there remains no preset timetable for the official launch.
Three primary objectives
The PBoC, in the 16 July paper, outlines three primary objectives of the digital yuan. To begin with, the aim is to ‘satisfy the public’s demand for digital cash’ while ensuring financial inclusion. ‘Via e-CNY wallet’ financial services could be proved to those without bank accounts and to people temporarily travelling in China who thus would not need to open a domestic bank account.
Supporting ‘fair competition’ and interoperability between different forms of digital cash is the second stated objective. The paper points out that e-CNY and existing electronic payment tools ‘are on different dimensions’ and ‘differ in many aspects’ albeit sharing similar payment functions. The paper goes on to point out the advantages of the digital yuan compared to existing payment instruments, such as it being ‘the safest asset in China’ and adds that ‘e-CNY supports managed anonymity, which helps protect privacy and user information’.
The point of ‘managed anonymity’ is listed as a design feature of the digital yuan in the paper, which says the e-CNY follows the principle of ‘anonymity for small value and traceable for high value’.
According to the central bank, ‘the e-CNY system collects less transaction information than traditional electronic payment and does not provide information to third parties or other government agencies unless stipulated otherwise in laws and regulations.’ Internally, the PBoC sets up a firewall for e-CNY-related information and strictly implements privacy protocols, it says.
‘Internationalisation… natural result of market selection’
The third and final objective is stated as ‘to echo the international initiative and explore the improvement of cross-border payments’, adding that this topic has been drawing much attention. ‘The internationalisation of a currency is a natural result of market selection. The international status of a country’s currency depends on its economic fundamentals and the depth, efficiency and openness of its financial markets,’ the PBoC writes, adding that the digital yuan ‘still designed mainly for domestic retail payments at present’.
China is one of a growing number of major nations involved in CBDC research collaborations in the cross-border space. In February, for example, the PBoC and central bank of the United Arab Emirates (UAE) teamed up with the equivalent authorities in Hong Kong and Thailand to investigate the potential for CBDC use in cross-border foreign currency payments.
The PBoC in its white paper says it intends to ‘actively respond to initiatives of G20 and other international organisations on improving cross-border payments, and explore the applicability of CBDC in cross-border scenarios’. It adds that it aims to explore ‘pilot cross-border payment programmes’ and ‘work with relevant central banks and monetary authorities to set up exchange arrangements and regulatory co-operation mechanisms’.
During a conference in March the director-general of the PBoC’s Digital Currency Institute of the, Mu Changchun, proposed several global ‘values’ or ‘principles’ for cross-border payments, emphasising the importance of inter-operability between 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 told the audience during a sesison of the Bank for International Settlements (BIS) Innovation Summit 2021.
Warnings of ‘triangle of risks’
China’s rapid progress with its CBDC trials has led to warnings of risks to the preservation of the euro’s international role.
Banque de France (BdF) governor François Villeroy de Galhau identified “the progress made by extra-European CBDCs and notably by the digital yuan” as part of a ‘triangle of risks’ during a speech in Paris on 29 June.
Villeroy de Galhau said he believes the development of China’s CBDC poses a threat to monetary sovereignty and that other countries must step up their efforts. The BdF has been one of the highest-profile central banks in respect of CBDC experimentation. On 8 July it announced that it had successfully completed a wholesale cross-border payment and settlement experiment using CBDC with the Monetary Authority of Singapore.
Over the past three years, US Congressmen have repeatedly voiced fears of potential risks to the national interest of the United States and the primacy of the dollar posed by China’s CBDC plans.
Yet this line of argument has also been met with scepticism in the US. The vice-chair for supervision of the Federal Reserve Board of Governors, Randal Quarles, in a speech at the 113th Annual Utah Bankers Association Convention last month said that “it seems unlikely, however, that the dollar’s status as the dominant currency in international financial transactions will be threatened by a foreign CBDC”. He added he was unconvinced that a US CBDC was required, implying that it would discourage innovation from the private sector as well as potentially constrict the availability of credit and many services of commercial banks.
‘ECB digital euro project ‘moves up a gear‘ – our news story (14 July 2021) on the European Central Bank’s governing council giving the green light to a multi-year project to explore the creation of a digital version of the euro
‘Digital yuan is ‘back-up’ to private payment platforms, says PBoC‘ – our news story (26 March 2021) on the director-general of the Digital Currency Institute of the PBoC saying China’s 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
‘China and UAE join HK-Thai explorations of cross-border digital currency payments‘ – our news story (24 February 2021) on the central banks of China and the United Arab Emirates teaming up with the equivalent authorities in Hong Kong and Thailand to investigate the potential for CBDC use in cross-border foreign currency payments