Deemed ‘e-CNY’, this currency is expected to overtake credit card spending in the country by 2023.
A CBDC would be faster and more secure for the country’s residents to pay for goods and services.
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It provides an alternative means for storing wealth, insulating savings from inflation, or even circumventing capital controls, which China has imposed on its citizens since last year.
According to a report by Accenture, the e-CNY is the first digital currency to be used in daily transactions.
It is also used for monetary policy management and financial inclusion.
The progress of China in this regard cannot be ignored by other countries around the world that are also looking into developing their digital currencies.
In addition, India has said multiple times that it is considering having a CBDC of its own – which would run parallel to cashless options like credit cards and mobile payments.
The move to digitizing transactions is set to cause some disruption, and whether CBDC will be adopted is still up in the air.
However, in the next few years, maybe when CBDC can truly revolutionize how we use money.
Major differences
CBDC refers to a digital representation of fiat currencies. However, all existing cryptocurrencies are independent of governments and central banks.
On the other hand, CBDC is issued by the central bank and backed by reserves of traditional fiat currency such as USD or Euro.
Unlike existing cryptocurrencies, which have a limited amount of coins with no intrinsic value, CBDC is backed by a nation’s economy and citizens who accept it as legal tender.
In addition, central banks are expected to impose measures to control their supply to maintain its value – i.e. by creating more or less of it, depending on the need.
Korea has already shown great interest in CBDC, saying it has “considerable interest” in a CBDC launch in the future.
The country’s top financial regulator stated that it was even looking into creating a ‘Korean Coin’, which users would use to make in-store payments.
South Korea is also planning to launch a cryptocurrency task force to draft measures to regulate the cryptocurrency market.
Benefits of E-CNY
Firstly, a digital currency will allow the government to adhere better to its foreign exchange reserves policy.
For example, China’s foreign exchange reserves should be used by the government for domestic debt repayments, not trade surpluses – this has led to the build-up of USD and Euro – as Beijing has been holding back on selling USD as it is wary of making money when others are in need.
China’s economy mainly depends on exports; however, the country is heavily price-controlled.
Its yuan is not freely convertible, and the government has been making it more difficult for firms to move their money out of China.
With a CBDC in place, the government can easily relax these rules and allow international finance to move in and out of the economy more freely.
Moreover, an e-CNY will also help consumers make transactions easier at the store level – reducing long lines and cash handling costs.
Challenges of Having a Digital Currency:
One of the main challenges with digital currencies is that they are not as safe as existing traditional fiat currencies.
Since digital currency is a legal tender, users do the same legal protections as fiat currency holders.
In addition, there is international consensus regarding how to approach digital currencies.
Although China has become more open about its CBDC, other countries like Japan and South Korea have been more conservative in their stance – banning cryptocurrencies altogether.
This lack of clarity on approaching cryptocurrencies can lead to complications in distinguishing between financial and non-financial transactions.
Furthermore, having a CBDC will give central banks an advantage over commercial banking institutions – which currently hold deposits and extend loans.
As a result, the central banks will have the power to issue fiat currency more efficiently, making it easier for them to manage monetary policy.
The road ahead for China’s CBDC is still uncertain; however, thankfully, there is also a growing movement towards decentralization and financial autonomy.
With a CBDC poised to become an alternative way of handling payments, we will likely see a disruption in the future of money.
However, the question remains whether this disruption will cause positive or negative outcomes on its way forward in the world.