Any UK citizen or business can choose to be a payment anarchist. People can ignore the fiat currency and request payments for goods or services in whatever form they like: cowrie shells, cabbages or Bitcoin.
What they can’t do is require that monetary debts be paid in cowrie shells, cabbages or Bitcoin. If creditors don’t accept legal tender, they can’t sue for non-payment.
That might not sound momentous, but it is a big anchor for the value of a fiat currency. Legal tender is also a liability of the central bank. Commercial banks create most of the money people use, but trust in the state stands behind it. The existence of legal tender is what makes money, money. That is: a store of value, a unit of account and the medium of exchange.
By that definition, private crypto assets can’t be money, despite – and much to the horror of the International Monetary Fund (IMF) – El Salvador’s decision to make bitcoin legal tender. Bitcoin is backed only by speculation and by the argument (or hope) that currencies can do without financial intermediaries and state oversight. But wild swings in the valuation of fashionable assets are nothing new, of course.
“I’m inclined to put cryptocurrencies in the same bracket as tulips,” says Charles Taylor, a Visiting Scholar at GW Law School and a former deputy comptroller of the currency in the US. “[That is] with the exception of central bank digital currencies.”
The only major economy that has already launched a CBDC is China, which unveiled trials of the e-CNY at the end of 2021. But others aren’t far behind. A 2021 survey by The Bank for International Settlements found that 86% of central banks were “actively researching the potential” of CBDCs.
What China is doing
The e-CNY aims to be retail “digital cash” and it is fully backed by the People’s Bank of China (PBoC). Choosing to replace cash and not bank accounts is an important step. It ensures that commercial banks won’t be disintermediated, and it spares the PBoC a major headache: offering consumer accounts and deciding who gets to borrow what.
China has decided that interest can only be paid on bank deposits, not on the e-CNY itself. Banks are also the only institutions that can convert e-CNY into deposits and pay it out again as cash.
But why has China launched the digital yuan while other major economies are still carrying out consultations and trials?
“To cater to its population’s needs as people use cash less and less,” says Dr Sara Hsu, associate professor of supply chain management at the University of Tennessee, Knoxville, and the author of China’s Fintech Explosion.
Hsu points out that because of the widespread use of Alipay and WeChatPay, which link people’s bank accounts to a digital wallet, China is already close to being cashless and many places no longer accept notes and coins.
“In addition, China has been opposed to decentralised digital currencies, such as Bitcoin [which was banned last year], and this is its answer to crypto,” she adds.
China is not the only jurisdiction that has an uneasy relationship with cryptocurrencies. Facebook’s Diem digital currency project was stopped short partly because of US regulatory objections.
Huge private platforms where the majority of people live their economic lives – as many as one billion Chinese people do so on Alipay – are, arguably, a threat to monetary stability if the transactions use a private crypto asset.