Globally speaking, digital currency is becoming the main interest and goal of currency issuing institutions in various countries. According to data from the Bank for International Settlements in January this year, 80% of the 66 central banks in the world are studying digital currencies, and 10% of central banks are about to issue their own central bank digital currencies (CBDC). Fearing that banknotes may spread the virus, the COVID-19 pandemic has become a catalyst for countries to issue central bank digital currencies. In China, despite the impact of the pandemic, the pace of China's research and experimentation of digital currency has accelerated, and various digital currency experiments and applications have been disclosed. This reflects that China's sovereign digital currency application pilot is progressing smoothly and may soon enter the landing stage.
On August 14, the Ministry of Commerce of China has issued a notice on the deepening of the pilot program for the innovation and development of trade and services. The notice proposes to carry out digital renminbi (RMB) pilot projects in the Beijing-Tianjin-Hebei region, Yangtze River Delta, Guangdong-Hong Kong-Macao Greater Bay Area, and in the central and western regions in China where conditions permit. The People's Bank of China formulates policy guarantee measures; first, Shenzhen, Chengdu, Suzhou and Xiongan New Area among other places. Relevant departments of the future Winter Olympics areas will also assist in the promotion and expansion to other regions which are deemed appropriate. This in general, is to implement the plan throughout the entirety of China. The original plan was that 30% -50% of the base currency to be replaced by digital currency within the next 3 years. However, given the current rate, about half of the currency in circulation in the next 3 years will be digital currency, ahead of the appointed time of the plan.
According to the information of the Chinese central bank, China's digital currency is still a sovereign credit currency, supported by national sovereignty as credit, with the characteristics of stability and statutory. In contrast, virtual currencies such as Bitcoin are decentralized private currencies without a stable credit base, and their prices have skyrocketed and plunged dramatically. At the same time, China's digital currency is divided into two levels. China still implements the same central bank-commercial bank-user placement model as the existing currency. The central bank also made it clear that at the level of the central bank to commercial banks, digital currency is still a centralized structure, and at the level of commercial banks to users, various models such as decentralized models can be adopted. Therefore, the digital currency issued by the Chinese central bank is not the same as the decentralized model based on blockchain technology such as the commercial Bitcoin. Facing the full implementation of digital currency pilots, a common question asked by many would be "what impact will the new digital currency have?". Researchers from ANBOUND have synthesized some points for reference:
(1)The functions of digital currency and paper currency are exactly identical. The central bank once pointed out that the digital currency of the People's Bank of China is mainly replaced by M0, which means that cash is replaced by digital currency. In other words, this is the digital version of renminbi, and it is cash with different denominations, whether it is RMB 100 or RMB 1. Storing such currency in one's mobile phone is equivalent of storing the banknote version of it in the pocket.
(2) Storage wise, just like paper money is stored in wallet, digital currency is stored in an app on mobile device. Unlike Alipay and WeChat that needs to be connected to the internet to make payments however, digital currency payments do not require the current mobile payment network to perform bank account-based settlements, but are carried out in a peer-to-peer manner like cash transactions. Even if the mobile devices of both parties are not connected to the internet, so long as the app is installed in the devices, transactions and payments can be made successfully if the devices are in close contact with each other during the transfer of funds.
(3) WeChat and Alipay are third-party payment methods, and the final settlement must be based on binding a bank account. The final payment and settlement are still the RMB in the bank account. However, digital currency does not require a corresponding bank account. It is essentially an e-wallet, having the same function as the wallet you put in one's pocket. As long as the mobile phone's battery is not used-up, the e-wallet can be used. A downside is that if the phone uses up all its battery, the e-wallet cannot be used.
(4) In the process of circulation, there is no counterfeit digital currency, and no wear and tear, while the central bank is able to monitor the flow of money easily. Such functions do not exist in paper banknotes. We know that after paper money is worn to a certain degree, it will be recycled and new money will have to be reprinted and put on the market, yet there is no such problem with digital currency. In addition, the central bank cannot find out where the paper banknote money is spent. With digital currency, such spending might be recorded. There are still many doubts regarding the bank's statement that digital currencies are untraceable by third parties. To combat this, regulations on data usage needs to be improved.
(5) At the currency level, digital currency such as Alipay and WeChat belongs to M2 type, which is a kind of derivative deposit, and is endorsed by Alibaba and Tencent. On the other hand, digital currency belongs to currency in circulation and belongs to the M0 type, which is endorsed by the People's Bank of China. The Chinese central bank stated recently that it is illegal to refuse the use of digital currencies. In other words, the national credit is behind the legal tender, the commercial bank credit is behind the bank card payment, while the internet enterprise credit is behind the Alipay and WeChat payment. These three belong to different levels. The national credit is greater than both the credit of commercial banks and the credit of internet enterprises, while the credit of commercial banks is greater than the credit of internet enterprises.
(6) Issuing a large amount of digital currencies without recycling paper money is essentially an act of printing money. At present, the issuance of digital currency is to replace cash and increase the proportion of currency digitization. However, if the digital currency develops to a certain extent, new ways of currency placement may be needed in the future.
These views are popular in the external market. However, from an analytical point of view, there are some puzzling and worrying points. Firstly, in such an eager launch of digital currency, there is the risk that the stock meltdown event will repeat itself. The popularization of digital currency and e-wallets requires the support of a large amount of digital infrastructure. In this regard, are banks and internet companies adequately prepared? Whether the current technology can support large-scale and high-frequency transactions remains unclear. On the other hand, whether many small and medium-sized banks can afford these technological inputs to participate in the digital currency era also requires serious research. If that is not the case, the digital currency will be exclusive to several big banks and companies like Alipay and WeChat, causing financial resources to be further concentrated, which is not all beneficial to the overall economy and financial market.
Secondly, the expansion of digital currency may face a gap in coverage of the population. In the economic activities of some remote areas, a large number of elderly people who do not use mobile phones may be further marginalized by the mainstream society, leading to a widening of the social wealth gap. The elderly population alone has a population of more than 100 million in China, which is not a small number. This means that paper money may still exist in some low-end markets for a long time, forming a self-enclosed cycle. In addition, although paper money will exist for a long time, a large number of cash transactions may face increasingly strict legal constraints. Chinese residents who store large amounts of cash at home might need to be cautious.
At the same time, there is not much support for the argument that the development of digital currency will promote the internationalization of the RMB. Digital currency will still be a geo-currency and will still be restricted by sovereignty. Although digital currency brings the convenience of cross-border payment, the terminal market is still regulated by the laws of various countries. In the case that the Chinese RMB is still not freely convertible, it is unrealistic to use it in large amounts across borders.
Digital currency brings new scenarios, new financial forms and new lifestyles, so this is not just a "stabilization" measure, but a new measure that stimulates "changes" in society, and it may very well produce various effects, both positive and negative in the future. All of which will require some form of preparation.
Final analysis conclusion:
There are more and more signs that the launch of China's digital currency is imminent. This will have various disruptive effects on the lifestyles of residents as well as the production of enterprises. All aspects of economic and social life affected by this relationship require special attention, and the large-scale implementation of sovereign digital currencies still needs to be carried out cautiously and orderly.
