China leads the way with digital currency, but other central banks have plans
China looks to be first out of the blocks with a central bank digital currency, but experts say it appears to be a more domestic initiative compared with projects being collaborated on by the world’s other leading institutions
The City of Shenzhen is distributing 10m yuan this week as part of the trial of the digital currency it is developing. While China is a clear leader in the race to release a central bank digital currency, other countries are not far behind, with Japan set to begin trials next spring.
This week the People’s Bank of China distributed 50,000 “red envelopes” of 200 digital yuan to winners of a lottery. The central bank claimed last week that over 1.1bn yuan had already been transacted by 113,000 consumers through its digital currency electronic payments system. The digital yuan will be accepted by more than 3,000 retailers.
The PBoC’s progress in developing its own digital currency electronic payment system is unrivalled, and no major economy has made such a firm strategic commitment to the strategy.
China aims to provide a public alternative to leading private sector payment providers. It could also be a forerunner of a programmable digital currency, which would greatly expand PBoC’s monetary policy toolbox.
Stuart Levey, CEO of Libra, Facebook’s digital payment system, told the Institute of International Finance annual meetings on Tuesda that such a system could reduce improper use of aid funds.
The Bank of International Settlements with the collaboration of the Bank of Canada, European Central Bank, Bank of Japan, Sveriges Riksbank, Swiss National bank, Bank of England and the Federal Reserve published a report on the foundational principles and core features of central bank digital currencies.
But the BIS’s group of central banks are pursuing a different goal from the PBoC. Martin Chorzempa, research fellow at the Peterson Institute, said: “China is mostly a domestic initiative, aimed at replacing physical cash. There are voices suggesting that this will increase international usage of [China’s currency], but for that to happen would require them to focus on the wholesale, inter-bank market, and their design choices don’t indicate that.”
By contrast, the group of seven central banks is likely to aim for a wholesale system facilitating cross-border payments and benefiting from a network effect.Chorzempa said the absence of the PBoC from the group of banks may indicate an irreconcilable difference in values. “The PBoC is likely to focus on a centralised system, giving itself a higher degree of data access and control.”