China is leading the way in issuing its own CBDC. Here's everything you need to know about the new currency
In mid-July, the People's Bank of China published e-CNY Research and Development Progress in China on the digital yuan. It can be informally called the White paper of the new digital currency. The document was prepared by a special unit responsible for the research and development of the digital yuan (e-CNY).
The document is of increased interest to crypto investors, blockchain enthusiasts and economists around the world due to the enormous potential for introducing digital currency as an official means of payments for 1.5 billion people in China.
What CBDCs exist today?
The digital yuan is just one type of central bank digital currency (from the English CBDC), which is increasingly talked about in the world. According to the CBDC Tracker project, more than fifty countries of the world have already expressed interest in issuing their own digital currency, and are at the research or development stage. In addition to China, France, Canada, United Arab Emirates, South Korea, South Africa, Uruguay are at the stage of pilot testing of CBDC.
There are already two state digital currencies in the world. The Central Bank of the Bahamas has issued Sand Dollars for internal settlements by the islanders through an official wallet app with the ability to integrate with local currency accounts at the banks participating in the experiment. The world's first CBDC launch for internal settlements took place on October 20, 2020.
The second DCash project, launched in 2021, is both retail and the first cross-border, combining several island states into a single digital money system: Antigua and Barbuda, Grenada, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines. In the near future, it has been announced that other states of the region will join the project: Dominica, Anguilla, Montserrat.
G20 and CBDC
CBDCs have already become the subject of discussion by the Central Banks of the G20 countries. For many G20 countries, it is primarily of interest to introduce CBDC as an international means of payment through the creation of a cross-border network. A joint report to the G20 by the International Monetary Fund (IMF), the World Bank and the Bank for International Settlements notes that using CBDCs for cross-border payments will reduce the number of intermediaries, increase the speed of transactions and lower the overall cost of making payments. And only a few countries in the world are focused on using CBDC in internal settlements.
Back to the digital yuan
Since 2014, the People's Bank of China has indicated interest in developing a CBDC aimed at the domestic market for settlements between individuals. Research, testing and implementation are carried out centrally and overseen by the Financial Committee of the State Council of the PRC.
The reasons for the release of the digital yuan in the White Paper are: improving the quality of financial and services and reducing the costs of maintaining the circulation of the money supply, which in 2020 amounted to 8.43 trillion yuan. The document states that already more than half of China's residents use digital payment in one way or another, which makes the country the second largest digital payment market in the world after the United States.
The goals of the issue are called meeting the demand of the population for digital money, increasing the convenience of payments in an efficient and safe way. As part of a pilot project for the implementation of e-CNY, on June 30, 2021, 1.32 million transactions were made in six cities to pay for goods and services with digital yuan, including utility bills, more than 20 million wallets were opened for individuals and 3.5 million for legal entities. individuals with a total transaction value of 34.5 billion yuan. Through the lottery, 200 thousand citizens of the country received 200 yuan each for free. To use the digital yuan, there is already a payment card that has a built-in digital display with the current balance.
The document does not provide a list of operators authorized by the Central Bank of China, but mentions that they will be commercial banks that have the right to open digital wallets of different levels to users as the user goes through KYC. Operators can develop mobile applications to use e-CNY and offer them to their customers for installation. On the other hand, authorized operators are required to protect users' personal and financial information and be responsible for e-CNY authentication.
The level of balance or volume of transactions for advanced KYC is not disclosed, but the principle of "anonymity in small" is declared to meet the demand for micropayments for which there will be no need to open an account, and "traceability" of large transactions to prevent tax evasion, illegal activity and money laundering of money. The document also talks about the need for each operator to provide autonomous work with e-CNY.
The future of CBDC and e-CNY
In the White Paper of the digital yuan, it is noted that the emission of the national digital currency is included in the aggregator M0 (banknotes and coins in circulation) and will be treated on a par with the classical yuan. It also confirms the legal status of the digital yuan as legal tender. The changes are confirmed by the amendment to the Law on the People's Bank of China. The yuan can now officially be in both cash and digital form.
It is mentioned that no interest is accrued on the digital yuan in circulation, as well as on the ordinary yuan. For the convenience of calculating the new currency, authorized operators will not charge fees for its storage, exchange and transactions.
There is no information on the further implementation of e-CNY in the document – no specific dates are indicated. China is actively following the discussion of cross-border settlements in the CBDC by the G20 countries, but domestic settlements in the country are still at the forefront. The technical feasibility of cross-border use of e-CNY is confirmed, however, it is emphasized that the main use of the digital yuan is through domestic payments.
Even at the testing stage, e-CNY has already become a digital currency that the whole world is talking about, and the volume of transactions and the number of users are comparable to some fiat currencies in the world. Although the document does not reflect questions regarding the identification of users by the amount, time and place of payment, there is a possibility of embedding the digital yuan in the "social rating" system in China.
The fact of the publication of the White Paper of the digital yuan can be considered a signal indicating the readiness of the Chinese government for dialogue in the field of cryptocurrency regulation, especially in connection with the recent prohibitive measures in the circulation of bitcoin and mining. Orientation to the domestic market is traditional for China. It remains open to question: what will be the dynamics of the use of digital and "classical" yuan in the coming years, as well as the policy for regulating e-CNY operators and KYC rules.