China was not included in recent talks among central bankers from developed nations on potential collaboration involving central bank digital currencies (CBDCs) that are technologically complementary and can coexist within a wider international payments ecosystem.
A working group was formed by the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, Sweden’s Riksbank, the Swiss National Bank and the US Federal Reserve, along with the Bank for International Settlements (BIS), all of which are said to share a common motivation – avoiding unintended barriers for transferring sovereign currencies in their electronic forms.
The People’s Bank of China (PBOC) was conspicuously absent from the international group, despite China being a world leader in testing its own digital sovereign currency. China is a member of the Committee on Payments and Market Infrastructures at the BIS, an international forum for central banks.
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“It seemed a sensible group to put together because we have a common platform of like thinking. We face similar environments, we have similar financial-sector structures, and a number of us have been working together,” Jon Cunliffe, deputy governor of the Bank of England, said during an online press conference on Thursday.
“A central bank digital currency could be an important tool for central banks to help them meet their public policy objectives,” he added.
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None of the participating central banks have formally decided to issue a central bank digital currency.
Benoit Coeure, head of the BIS Innovation Hub and a former board member of the European Central Bank, said that while there have been a number of discussions with China, its nascent digital yuan is intended primarily for domestic use, making international cooperation unnecessary for now.
China’s digital yuan has not been officially rolled out, but it has been used in more than 1.1 billion yuan (US$162 million) worth of transactions as part of a series of ongoing pilot programmes across the country in the past year.
These trials have taken place in the cities of Shenzhen, Suzhou, Xiongan and Chengdu, as well as at venues for the 2022 Winter Olympic Games in Beijing, with 13 million transactions having been processed using the currency, according to Fan Yifei, deputy governor at the central bank. This makes it by far the most widely used central bank digital currency in a commercial setting.
An article last month in China Finance, a magazine run by the PBOC, stressed the need for China to become the first nation to issue a digital currency in its push to internationalise the yuan and reduce its dependence on the global US dollar-based payment system.
China wants to develop its own system, independent of the current payment system dominated by the US dollar
Sky Guo, Cypherium
A digital yuan will improve the efficiency of public policy management and will help China boost its domestic economy, said Sky Guo, founder and CEO of New York-based blockchain company Cypherium. Guo’s company has partnered with China’s government-backed Blockchain Service Network, which is focused on enterprise uses for blockchain technology.
In its next step, China is likely to consider cross-border digital yuan transactions, because the US-China trade war has pushed Beijing to develop its own payment system for global trade and investments, accelerating its efforts to internationalise the yuan, and thereby reduce China’s reliance on the US dollar payment system, Guo said.
“There are differences with the digital yuan, because China wants to develop its own system, independent of the current payment system dominated by the US dollar,” Guo said. “It should have its own development path and its own financial system.”
Jerry Chan, CEO of blockchain firm TAAL, said China may also want other countries to use the digital yuan so that it can trace and control capital flows into and out of the country more easily, via its own global payment platform. This would also allow for better monitoring of money laundering and other illegal activities.
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“China definitely wants everybody to use their digital currency because they want to grab that market share, but the bigger desire is the ability to control the outflow of capital,” Chan said, noting how digital currencies are traceable. “If you use the Chinese digital currency, then (the PBOC) will know where it goes globally.”
Concerns that digital assets could be used for capital flight have also prompted the Chinese government to prohibit its citizens from directly exchanging the yuan for cryptocurrencies such as bitcoin via online sites, and it has also closed cryptocurrency exchanges, Chan said.
But onerous capital controls and restrictions on cryptocurrencies in China stand in contrast with the principles for digital currencies being adopted by other major central banks.
New forms of commercial money such as private cryptocurrencies are different instruments used as a means of payments that should coexist with central bank digital currencies in the same ecosystem, as long as they provide stability and safety for citizens, Coeure said.
“China has a particular way to do it. Other central banks can have different ways to do it,” Coeure said. “We’re not prescribing the technical architecture on CBDCs.”
While China has taken the lead in digitising the global economy, and may gain a first-adopter advantage for now, Chan said that restrictions on capital flows and private money raise questions about whether these could ultimately hurt China’s digital ambitions and the economy in the long term.
Companies will need to decide whether they will accept that doing business in China will require them to adapt to the digital yuan, or if they will instead use other digital currencies that are freely convertible outside China.
“This is probably going to be the biggest economic experiment that planet Earth has seen,” Chan said. “Once we go digital, it just means that these digital currencies will compete with each other. These borders of economic influence are no longer going to be contained by political borders any more.”
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