China needs to ensure the reliability, security and authority of the digital renminbi
Virtual currencies such as bitcoin have survived and thrived even under strict financial regulation, prompting central banks to undertake research and development of digital currencies.
According to a survey by the Bank for International Settlements, 80 percent of central banks have begun developing a digital currency. The European Central Bank, for instance, may launch a digital euro this year. The United States is also attaching great importance to the role of the US dollar in the era of the digital economy. Federal Reserve Chairman Jerome Powell said that a digital dollar would improve the payment system in a variety of ways and help maintain the primary status of the dollar. At a hearing of the House of Representatives Financial Services Committee on June 17,2020, he stressed that a government-backed digital dollar needs to be introduced to support the US economy and uphold the dollar’s dominance as the world’s reserve currency. He said the US should promote technological reform for the dollar’s digitization, otherwise the dollar may lose its position as the world’s reserve currency.
China, too, is rolling out a digital currency. The amendment to the Law on the People’s Bank of China, promulgated in October last year, listed the digital renminbi as a legal currency. According to the 14th Five-Year Plan (2021-25), efforts will be further made to advance the use of the digital currency. Since China has the world’s largest population and digital payment market, it needs to ensure the reliability, security and authority of its digital currency. For its wide adoption and application, related departments need to establish a reliable technological framework for its use, promote its expanded application and develop laws and regulations.
The digital renminbi is likely to change China’s financial landscape in a number of ways.
First, it will change the payment market, adding an official payment tool to the retail market currently dominated by market-oriented payment systems. In the next five to 10 years, the digital renminbi will be used along with payment tools such as WeChat Pay, Alipay, UnionPay and bank cards. Although cash will not completely disappear from the market, the digital renminbi will replace it for many uses.
Second, it will change competition in the banking industry. The digital currency electronic payment system will enable value transfer to be made without bank accounts, which will lead to a declining reliance on them. People will then be able to choose financial services and institutions more freely, which will boost competition. Financial institutions that are used to relying on large-scale operations to cover costs and attract customers will need to improve their ability to provide innovative products and services and apply digital technologies.
Third, it will change the supervision of the monetary market as the central bank will have real-time, complete and structured data on circulation of the digital currency, which can ensure fine-tuned control of the total currency supply. As the central bank can regulate and control the currency market more directly, it will also assume more direct responsibilities, providing more liquidity support to commercial banks during an economic crisis.
Amid the changes in the international monetary system, China needs to pay special attention to the US’ strategic options for the digital dollar. Libra backed by Facebook has a global user base of more than 2 billion in the legal tender linked to Libra, the US dollar accounts for more than 60 percent. Once it gains strong market access in Western countries, it is likely to quickly become a global super-sovereign digital currency. The currencies of small countries can easily fall prey to such a super-sovereign digital currency, especially when legal currencies of the countries lose the trust of people during economic recession.
The issuance of government-backed digital currencies counts on reliable and feasible technological and institutional innovation.
Used for both domestic and cross-border payments, digital currencies will play a key role in the global digital economy competition. While digital currencies can help improve payment efficiency, they may fracture the current international monetary and sovereign currency system. For countries that have issued or are issuing digital currencies, the internationalization of digital currencies will pose challenges to monetary policies and liquidity control. The countries whose legal currencies are replaced by foreign digital currencies will see the status of their sovereign currencies threatened and the effects of monetary policy transmission weakened, which will escalate financial risks.
An internationalized digital renminbi can help safeguard China’s monetary sovereignty, protect its financial security and enhance its national strength. But efforts are needed to make the digital renminbi a leading central bank digital currency.
China needs to accelerate the building of its digital financial system and formulate rules on digital financial supervision, digital currency regulation and legal digital currency issuance. It needs to enhance its role in international cooperation to help establish unified standards for regulation in the formulation of global digital finance systems and rules.
The author is former president of the Bank of China.