I like my cash, more so now with all the uncertainty around. Why fix something that is not broken ?
- Digital economy needs an updated version of cash – China is probably the biggest digital economy in the world, managing around 1 trillion mobile payments transactions annually. Its development needs a better retail payments infrastructure. Cash and the environment of using cash is changing, mobile payments account for around 65 % of all transactions followed by cash at 20 % in China and the picture is not very different in other parts of the world.
- Financial inclusion is critical – With a diverse population living is rural and urban parts of the country. Diversity in the form of cash(renminbi and e-CNY) will make financial services more accessible to a wider population. e-CNY has intrinsic value and it can be used to make offline as well as online transactions.
- Cryptocurrencies and stablecoins are rampant – The total market capitalization of various cryptocurrencies is around $1.3 trillion(June 2021), and the likes of Bitcoin have had strong adoption. Stablecoin’s pegged to sovereign currencies have also received acceptance. With all their benefits, they are still highly volatile and speculative. They pose multiple risks to the global economy. In a way, CBDC’s are being leveraged to counter the rise of private money.
- Cost of managing cash is high – Every stage in the cash cycle consumes resources, design, minting and printing, deposit and withdrawal, identification, processing, destruction etc. A CBDC design eliminates a lot these costs.
What is a “retail CBDC” and “e-CNY” anyways ?
- A CBDC or central bank digital currency is central bank issued currency which is a legal tender. There could be different types of CBDC’s which are today categorized based on their use; retail CBDC(issued to general public), wholesale CBDC(issued to financial institutions) or general purpose CBDC(can be used for retail and wholesale uses).
- e-CNY is the digital version of Chinese fiat currency renminbi, and is a legal tender and have intrinsic value. It is centrally managed by the People’s bank of China(central bank) and operated by authorized operators. Commercial banks issues e-CNY to general public and offer other services. Non banking operators can also offer services on top of the e-CNY payment system.
- The currency does not bear interest and wallets are the medium of access for the currency. e-CNY is both value and account based, and can be used in offline transactions as it can be stored in hardware wallets and online transactions using accounts.
The Chinese model, showing the world how it’s done…again !
- Operating model – People’s bank of China(PBOC, central bank) uses a “two tier model”, where it centrally controls issuance of e-CNY to authorized operators like commercial banks distribute it to the general public.
- PBOC uses a quota management method to issue e-CNY to authorized operator who issue different types of wallets and provide payment services.
- e-CNY does not bear interest, hence it does not compete with the deposit services of the commercial banks, and the cost of issuing and processing is also low. PBOC does not charge the authorized operators and they do not charge general public for basic services.
- Managed anonymity, high value can be tracked, low value aren’t.
- Programmability, the e-CNY payment system can be programmed with smart contracts to create self executing payment flows as long as all parties agree.
- Interoperability, e-CNY and physical renminbi are interoperable, they both have the same value and status. Authorized operators can tap into both the payment systems to offer services.
I need wallets to use e-CNY, these have been around for a 100 years, what’s new ?
- Wallets are the medium of using e-CNY, PBOC makes the rules and the authorized operators develop applications to offer services.
- Wallets are based on the strength of the user, there can be various attributes that define a wallet. Personal or corporate wallets, software or hardware wallets (as e-CNY has intrinsic value it can be stored on a hardware device), parent wallets and sub wallets which can be configured and controlled for usage.
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Alright, sounds interesting, where is this going in the future ?
Internationalization of e-CNY – Even though e-CNY is a retail CBDC, it is essentially ready for cross border use in form of a wholesale CBDC. Eventually PBOC will most likely work with other central banks to create “multi – CBDC bridge” to improve cross border payments. Pilots projects are already underway with Hong Kong, Singapore and BIS.
In conclusion, Fiat currency needs an update, but there is a case to be made that electronic mobile payments may just suffice, but sometimes updating the most fundamental piece of the economy is what you really need. The world had moved on, the central banks and governments need to catchup, CBDC are a good starting point but still a long way to go.
It is believed that government banknotes were first issued in China around the 11th century AD. That was a long time ago and the world we live in today is very different, but China has done it again. It is the first major economy in the world to have launched e-CNY, a retail CBDC(Central bank digital currency) or “digital fiat currency” as they call it.
e-CNY is a digital version of the physical currency of China, renminbi and holds the same status and is considered a legal tender. e-CNY is a “retail CBDC”, which is designed to be issued to the general public and aid in their day today needs.
The area of CBDC’s along with other digital currencies is evolving at an exponential rate, this article is an attempt to covers basic aspects of the Chinese CBDC.