China takes a leading position in the issue of issuing its own CBDC. We tell you everything you need to know about the new currency
In mid-July, the People’s Bank of China published a document “E-CNY Research and Development Progress in China”, dedicated to the digital yuan. It can be informally called the White paper of the new digital currency. The document was prepared by a special unit responsible for the research and development of the digital yuan (e-CNY).
The document is of increased interest to crypto investors, blockchain enthusiasts and economists around the world because of the huge potential for the introduction of digital currency as an official means of payment for 1.5 billion Chinese residents.
What CBDCs exist today?
The digital yuan is just one of the varieties of the digital currency of central banks (from the English CBDC), which is being talked about more and more often in the world. According to the CBDC Tracker project, more than fifty countries of the world have already shown interest in issuing their own digital currency, and are at the research or development stage. In addition to China, France, Canada, the United Arab Emirates, South Korea, South Africa, and Uruguay are at the CBDC pilot testing stage.
There are already two state-owned digital currencies operating in the world. The Central Bank of the Bahamas has issued Sand Dollar for internal settlements of islanders through an official wallet-an application with the ability to integrate with local currency accounts in banks that participate in the experiment. The world’s first CBDC launch for internal payments took place on October 20, 2020.
The second DCash project, launched in 2021, is both a retail and the first cross-border one that unites several island states into a single digital money system: Antigua and Barbuda, Grenada, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines. In the near future, other States of the region will join the project: Dominica, Anguilla, Montserrat.
G20 and CBDC
CBDCs have already been the subject of discussions by the Central Banks of the G20 countries. For many G20 countries, the introduction of CBDC as an international means of payment through the creation of a cross-border network is primarily of interest. A joint report for the G20 prepared by the International Monetary Fund (IMF), the World Bank and the Bank for International Settlements notes that the use of CBDC for cross-border payments will reduce the number of intermediaries, increase the speed of transactions and reduce the overall cost of making payments. And only some countries of the world are focused on the use of CBDC in internal calculations.
Let’s go back to the digital yuan
Since 2014, the People’s Bank of China has indicated interest in developing a CBDC focused on the domestic market for settlements between individuals. Research, testing and implementation are conducted centrally and are supervised by the Finance Committee of the State Council of the People’s Republic of China.
The reasons for the release of the digital yuan in the White Paper are: improving the quality of financial and services and reducing the cost of maintaining the circulation of the money supply, which in 2020 amounted to 8.43 trillion yuan. The document states that more than half of Chinese residents already use a digital form of payment in one way or another, which makes the country the second digital payment market in the world after the United States.
The objectives of the issue are to meet the demand of the population for digital money, to increase the convenience of payments in an efficient and secure way. As part of the pilot project for the introduction of e-CNY, on June 30, 2021, 1.32 million transactions were made in six cities to pay for goods and services with digital yuan, including utility payments, more than 20 million wallets were opened for individuals and 3.5 million for legal entities with a total transaction amount of 34.5 billion yuan. Through the lottery, 200 thousand citizens of the country received 200 yuan each for free. To use the digital yuan, there is already a payment card that has a built-in digital scoreboard with the current balance.
The document does not provide a list of operators authorized by the Central Bank of China, but it is mentioned that they will be commercial banks that have the right to open digital wallets of different levels to users as the user passes KYC. Operators can develop mobile applications for using e-CNY and offer them for installation to their customers. On the other hand, authorized operators are required to protect users ‘ personal and financial information, as well as be responsible for e-CNY authentication.
The level of balance or transaction volume for advanced KYC is not disclosed, but the principle of “anonymity in small” is declared to meet the demand for micropayments, for which it will not be necessary to open an account, and the “traceability” of large transactions to prevent tax evasion, illegal activities and money laundering. The document also states the need for each operator to provide autonomous work with e-CNY.
The Future of CBDC and e-CNY
The White paper of the digital yuan notes that the issue of the national digital currency is included in the aggregator M0 (banknotes and coins in circulation) and will be treated on a par with the classic yuan. The legal status of the digital yuan as a legal means of payment is also confirmed. The changes are confirmed by an amendment to the Law on the People’s Bank of China. Now the yuan can officially have both cash and digital form.
It is mentioned that no interest is charged on the digital yuan in circulation, as well as on the ordinary yuan. For the convenience of calculating the new currency, authorized operators will not charge fees for storing, exchanging and conducting transactions.
There is no information on the further implementation of e-CNY in the document — no specific dates are specified. China is actively following the discussion of cross-border settlements in the CBDC by the G20 countries, but domestic settlements in the country are still at the forefront. The technical possibility of cross-border use of e-CNY is confirmed, however, it is emphasized that the main way to use the digital yuan is domestic payments.
even at the testing stage, e-CNY has already become a digital currency that the whole world is talking about, and the volume of transactions and the number of users are comparable to some fiat currencies of the world. Although the document does not reflect issues related to the identification of users by the amount, time and place of payment, there is a possibility of embedding the digital yuan in the “social rating” system in China.
The fact of the publication of the White paper of the digital yuan can be considered a signal indicating the readiness of the Chinese government for a dialogue in the field of cryptocurrency regulation, especially in connection with the recent prohibitive measures in the circulation of bitcoin and mining. Orientation to the domestic market is traditional for China. The question remains: what will be the dynamics of the use of digital and “classic” yuan in the coming years, as well as the policy on regulating e-CNY operators and KYC rules.