It’s getting harder to ignore digital currency these days with the flood of news on the topic.
Amid the noise, a little something called central bank digital currencies (CBDC) has crept into the public eye, but not much is known about its connections with other parts of the payments landscape, especially the link with a larger trade-related ecosystem China is trying to cultivate.
The understated moves of China, in particular, has gotten fewer column inches than equivalent noise about the trading frenzy in bitcoin and linked issues.
What does CBDC’s have to do with trade and settlement? And why does China seem so keen to introduce CBDCs when others are (so far) only dipping their toes into the game?
Domestically, central banks are worried that the rise of privately-issued digital currencies will undermine the policy effectiveness of traditional instruments like the ability to control money supply, and set interest rates to conduct monetary policy.
China’s stance on the risks of private cryptocurrency has been unequivocal. In July 2021, the Peoples Bank of China (PBOC) issued a white paper which singles out the risks of privately-issued cryptocurrency as a systemic risk to China’s financial system:
“ … 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”
Since the white paper, China has intensified crackdowns on domestic mining and the use of cryptocurrency. The signal is clear – private cryptocurrency issuers and users, be warned.