It has been widely reported that the People’s Bank of China is nearly ready to issue the first Central Bank Digital Currency (CBDC) to streamline the payment/transfer process for the Renminbi. Many central banks are reviewing the pros and cons of a CBDC but China is expected to bring one to fruition perhaps within weeks.
Of note, Tommaso Mancini-Griffoli, Deputy Division Chief in the Monetary and Capital Markets Department from the IMF recently pitched the concept of a “synthetic CBDC” (Central Bank Digital Currency).
Much of the discussion of a CBDC is incorporated into the debate regarding Libra, Facebook’s attempt to create a global non-sovereign digital currency and the possible economic impact of such a currency may have on fiat currency.
China has fully embraced the importance of blockchain technology and recently Premier Xi Jinping said that China will lead the development of blockchain technology globally.
In the past, Chinese officials have said that its CBDC will not be entirely based on blockchain as the tech cannot handle the necessary volume of transactions.
Last week, a report in Caixin [translated], authored by Zou Chuanwei, PhD, the Chief Economist at Wanxiang Blockchain, delved further into how the CBDC will be issued and managed by the People’s Bank of China.
Chuanwei explains the CBDC as a Digital Currency/Electronic Payment or DC/EP service, calling it the most implementable CBDC in the world. But while highly implementable, the CBDC will use a centralized ledger and “blockchain may be used for registration of the identification of digital currencies and is in an auxiliary position.” The centralized ledger is based on the UTXO model or “unspent transaction output.” Or, perhaps,
Chuanwei hypothesizes that the PBOC does not have plans to fully replace cash with DC/EP but it will have strong policy implications for monitoring of capital flows and the internationalization of the Renminbi.
“Digital currency does not pay interest, and does not assume other social and administrative functions besides the currency’s four functions (value scale, means of circulation, means of payment, and value storage). In order to ensure that the issuance and withdrawal of digital currency does not change the total amount of central bank currency issuance, there is an equal exchange mechanism between the commercial bank deposit reserve and the digital currency: in the issuance phase, the central bank deducts the commercial bank deposit reserve and issues the same amount of digital currency; In the return phase, the central bank increased the deposit reserve of commercial banks in equal amounts.” [translated]
The CBDC will follow the “traditional central bank-commercial bank binary model.”
While the translation can be challenging to interpret at times Chuanwei has provided the best analysis of the Chinese CBDC based on publicly available information. Of importance is China’s review of the impact on policy, more specifically monetary policy. Chuanwei states that DC/EP has little effect on the currency multiplier, or money supply, as M0 will increase and M2 will decrease simultaneously.