Central bank digital currencies (CBDC) are a global reality – and China has one of the world’s most advanced projects. With more than 20 million personal and 3.5 million corporate “wallets” opened, China’s CBDC transactions already exceed RMB34.5 billion. Hong Kong, as a leading international financial centre and the main gateway to China’s economy, is assessing the feasibility of developing its own CBDC assets.
The People’s Bank of China (PBoC) notes that the digital RMB, also known as e-CNY, is being introduced as China transitions towards a digital economy and cash usage declines. While paper money is unlikely to completely disappear in the next decade, many societies are increasingly turning to digital payments as technology penetration, financial inclusion and data protection develops more broadly.
As 80% of global central banks are now engaging in some kind of CBDC projects, China has completed the research and development of the design and function of e-CNY, and will further expand the scope of trials and uses. “Digital fiat currency is a new thing,” the PBoC said in a recent report. “Its impact on the economy and the financial services sector can be assessed through pilot tests and practices.”
China has said it is seeking to capture the benefits of digital money while enforcing capital controls. The CBDC would be distributed through China’s banks, taking some power back from the digital payment systems used on ecommerce and other technology platforms, which a PBoC governor, said last year pose “challenges and financial risks.”
China is one of the earliest countries to develop a CBDC: a taskforce was set up to study digital fiat currency in 2014. Fully backed by the credit of the PBoC, e-CNY is a legal tender that is backed by RMB in a 1:1 ratio. E-CNY would allow even those who do not have bricks-and-mortar financial accounts to use it for small-amount transactions, granting access to the unbanked. In China that would bring 200 million rural people into the financial system.
China’s CBDC differentiates itself from other central banks around the world as it is retail-focused, as told by a blockchain software company’s management to S&P Global. “Most [other] central banks have been first focusing on wholesale CBDC and now are working on retail CBDCs,” he said.
There will be different types of e-wallets, depending on the type of holder, privacy levels and if they are in software or hardware format. The tiered e-wallet design and encryption technologies enable ‘managed anonymity’ that can balance privacy protection and risk control requirements. CBDC transactions have already been trialled in Shenzhen, Suzhou, Xiong’an New District in Hebei, and Chengdu, as well as sites for next year’s Winter Olympics.
CBDC preserves anonymity while enabling transactions to be traceable, which would be useful in countering such illegal activities as money laundering. Building on the trackable series of transactions, policymakers would be able to strengthen the implementation of monetary policies and enforceability of other laws and regulations.
In Hong Kong, the Financial Services Development Council, which engages with government and the private sector to promote the further development of and map out the strategic direction for financial services, has closely monitored CBDC development and its implications for Hong Kong.
“Hong Kong has been actively participating in the cross-border CBDC trials, thanks to the Hong Kong dollar’s high liquidity,” said Laurence Li, FSDC chairman. “CBDCs would become more mainstream in the future non-monetary economies and funds are expected to be redistributed from other digital assets to CBDCs, given that they are government backed.”
The Hong Kong Monetary Authority (HKMA) – the special administrative region’s banking regulator – is conducting a joint feasibility study with the Bank for International Settlements Innovation Hub Centre in Hong Kong on developing a digital Hong Kong dollar (e-HKD) as a CBDC for retail transactions, similar to the e-CNY. The e-HKD would be an electronic version of a banknote, and the mechanism of issuing the digital currency will be the same as that for physical bank notes under the US dollar currency peg system.
PBoC has already signed a memorandum of understanding with the HKMA and also joined a global central bank digital currency initiative called the Multiple CBDC Bridge (m-CBDC Bridge), which is being led by the Bank for International Settlements (BIS), the so-called “central bank of central banks” in Basel. The Bank of Thailand and the Central Bank of the United Arab Emirates have also signed up to that project.
“We aim to, through this m-CBDC Bridge, foster a collaborative environment for central banks and the private sector to further explore the potentials of DLT to improve the settlement and liquidity management efficiencies in cross-border payments,” Howard Lee, Deputy Chief Executive of the Hong Kong Monetary Authority, told the BIS Innovation Summit.
“We are grateful for the participation from the private sector including two securities exchanges, banks, and multi-national corporates in the project,” he added. “Such collaborative efforts give us much greater confidence that the ideas and solutions generated through this project would take account of the needs of various market players in different markets.”
CBDCs are not a gimmick or a momentary trend – they can have real-world implications beyond monetary policies. For example, the e-CNY can help China to achieve some important long-term goals beyond just payments. In a recent trial in Chengdu, individuals were encouraged to apply for free e-CNY coupons to take public transport, helping support Beijing’s carbon neutrality target.
Overall, CBDCs would be more environmentally sound than traditional “fiat” currencies, with their production of bank notes that use polymers in a bid to combat forgery and are therefore hard to recycle. They also have clear advantages over cryptocurrencies such as bitcoin.
“Given their lack of intrinsic value, acute price fluctuations, low trading efficiencies and huge energy consumption, they can hardly serve as currencies used in daily economic activities,” the PBoC said in a recent report.
As FSDC has noted, “the financial services industry appears to be still on the learning curve regarding the implications and impacts of the adoption of technology and sustainability.” But as awareness grows, that might clear the way for CBDCs to dominate the virtual currency space, as they are not expected to create significant environmental challenges as their potential rivals.