The Bank of Japan is one of the latest institutions to make public its plans to experiment on how to operate its own digital currency, joining an expanding club of central banks, concerned with the rapid pace of private-sector innovation in the field of payments. Among its members, the club counts the central banks of Canada, Eurozone, Japan, Sweden, Switzerland, United Kingdom and United States. China is well ahead in this journey, having planned for a Central Bank Digital Currency (“CBDC”) since 2014.
The Digital Currency/Electronic Payment (“DCEP”) experiment of the People Bank of China provide some clues of what a CBDC may look like.
In its current incarnation, China’s central bank is responsible for issuing and distributing the digital yuan to commercial banks. Commercial banks will then distribute the digital money to end users.
Is DCEP really cash? Similar to M0 (banknotes and coins), DCEP is non-interest bearable, fully backed by the central bank and essentially a central bank liability. So far so good? Not really, a claim on an intermediary, albeit tightly controlled and regulated (and in the case of China, owned by the state), is not technically as strong as a claim on the central bank itself.
Risk managers describe this as counterparty credit risk, the risk, for example, that the intermediary defaults, having failed to maintain sufficient reserves at the central bank.
Like M0, DCEP can be exchanged off-line, but with some limitations and risks, fraud, for example, perpetrated by spending the same coins prior to updating the central ledgers.