After five years of hard work, the People’s Bank of China (PBOC) is reportedly close to issuing is digital currency (D-RMB). Its research and development are, in large part, motivated by domestic financial innovation. Data from the BIS shows that, whereas bank notes and coins in circulation in the United States and the Euro Area are rising as a share of GDP, Chinese consumers are abandoning cash for mobile payments, predominately made via their cell phones.
The rise of mobile payments is a boon for Chinese merchants. This is especially true for smaller ones, who no longer have to incur the costs of handling cash and the risks of theft. However, from the PBOC’s point of view, less cash means less seigniorage. Moreover, it is concerned about financial exclusion. The elderly, those from rural areas and visitors from overseas who lack access to the Alipay and WeChat Pay platforms can run into problems paying with cash or credit cards. Indeed, last year, the PBOC cracked down on retailers who refuse to accept cash.
Mark Kruger Consultant Services 1 Services de consultation
The D-RMB is also motivated by the advent of cryptocurrencies and Libra. The PBOC sees the D-RMB as an issue of national currency sovereignty and wants to play a leading roll in digital currency development instead of catch-up.
The PBOC has begun to reveal some of the D-RMB’s design features. • It will be a centrally-managed, account-based system and not a decentralized token system like Bitcoin. The PBOC will work with the banks and payment services providers, rather than set up a parallel system. It is unlikely to be blockchain-based, as this technology is too slow for the tremendous volume of mobile purchases that are already surging through the payments system.
• The D-RMB will be designed to have little impact on monetary policy and financial stability. Financial institutions will have to provide 100% backing to use the currency. This ensures that no additional money is created and that the D-RMB remains the liability of the central bank. No interest will be payed on the D-RMB. This will prevent disintermediation by ensuring there is no impact on banks’ funding costs, an important consideration in China, where small banks have trouble raising funds.
• The PBOC says the system will provide for “controllable anonymity”. A balance will be struck between the public’s desire for secrecy and the need to prevent money laundering, terrorism financing, and tax evasion. This will likely be done by limiting the size of the digital wallets and by setting limits on the value of transactions.
The digital currency could accelerate the internationalization of the RMB. In addition to addressing the domestic concerns noted above, there is potential for the D-RMB to be the platform of choice for small, cross-border payments. Remittances are currently incredibly expensive: the World Bank estimates that it costs $14 to remit $200. With the D-RMB, the cost would essentially fall to zero. While it sounds far- fetched, it would only require two simple steps both of which could be taken now. The parties would open RMB accounts with the local branches of Chinese banks. And they would download the WeChat or Alipay apps from the Apple or Google Play stores. Both of these apps have funds transfer functions. Now all they have to do is wait for the D-RMB to be issued.
PBOC Governor Yi Gang recently noted that there is no defined timetable to roll out the D-RMB. Following news reports over the summer that the rollout of the D-RMB was imminent, a number of unscrupulous fintech firms advertised themselves as partnering with the PBOC. On November 13, the central bank warned the public that it had not yet issued the D-RMB and to guard against fraud and pyramid schemes. Nevertheless, given the potential benefits and the strength of its mobile payments infrastructure, it is only a matter of time before we see China’s digital currency.
Mark Kruger Consultant Services 2 Services de consultation