Understanding the Impacts of the Digital Renminbi and the Central Bank Digital Currency
China has recently announced plans to mint a digital version of the renminbi known as the Central Bank Digital Currency (CBDC).
This is part of the Asian giant’s plan to develop a fully-fledged digital nation, which is already evident today with its increasingly cashless society.
To put this into numbers, cashless platforms like Alipay and Tencent’s WeChat Pay processed $8.3 trillion in payments in the first quarter of 2019 — a staggering 15% increase from the year before.
How does the digital renminbi play a role in China’s economy and what does this mean for cryptocurrency markets and investors?
How Does China’s Central Bank Digital Currency Work?
Digital currencies have several glaring advantages over cash, including convenience, the ability to make instant transactions, and little to no transaction fees.
Early details from China’s central bank have shown that the primary goal of the digital currency is to accelerate the adoption of smartphone-enabled bankless transactions. This is a logical move considering the country has close to 1.58 billion smartphone users at the time of writing.
Based on several patents registered by the People’s Bank Of China (PBOC), the system works by using a digital wallet that can be reloaded with cash through any commercial bank. Businesses and consumers can then use their balances to send and receive payments to other digital wallets.
The CBDC will also have two different layers to separate its use cases. The first layer connects the central bank and financial institutions (e.g. commercial banks), while the second layer is meant to facilitate transactions between commercial banks and end consumers.
This two-tiered system is ideal for the blockchain since it can be used as a medium of exchange that can store value, transfer assets, and verify transactions all in one go. However, there has been no word from PBOC officials on whether or not the CBDC will be built on the technology.
What Are the Potential Impacts of the Digital Renminbi?
- Increased Demand for the Renminbi
By replacing its money supply with the CBDC, China stands to gain several benefits in its financial system. These benefits include reducing operating costs from circulating physical cash and giving the central bank more control and visibility over transactions.
The increased efficiency and insignificant fees of digital payments make them perfect for low-cost international payments, which could spark demand for the Chinese renminbi, hence increasing its value in global markets.
2. More Efficient Crackdown on Illicit Transactions
Identifying illicit payments has long been a challenge for cash transactions since they cannot be tracked with total authenticity. That is set to change with the CBDC. A shift to digital payments will allow the Chinese government to detect transactions involving illegal activities (e.g. money laundering) more easily with the availability of digital ledgers.
3. Improved Economic Growth
If the CBDC is a success, citizens would be encouraged to exchange their cash for digital currency, which will strengthen the reserves of China’s central bank. The increased cash reserve will boost China’s spending power, which is massively beneficial in recovering from the country’s economic slowdown.
4. Better Control Over Bank Loans
Discoveries in the PBOC’s patent filings in 2018 showed that banks must include details about borrowers and interest rates before approving a digital currency-backed loan. This will allow the PBOC to increase its control over loans, which overcomes many of the problems associated with bank lending (especially non-payments and fraud).
Digitized currency is also a great solution to citizens hoarding their cash since it can be used to apply negative rates. Negative interest rates are situations where banks charge customers to store their money, rather than paying out interest.
Digital Currency Trends in Other Central Banks
China is not the only country making progress in this space. In the past year or so, a noticeable number of central banks across the world have started developing or looking into deploying their own digital currencies.
The Marshall Islands is one of the more proactive countries on the list, with the country’s officials laying out plans to deploy its nationalized cryptocurrency known as the Marshallese sovereign or SOV, within the next few years.
Uruguay has also implemented a pilot program to test its e-Peso digital currency, which has been applauded by the IMF for its stability and utility. Similarly, Sweden is experimenting with the e-krona while Venezuela is still working on integrating the controversial Petro cryptocurrency into its devastated economy.
This trend is further backed by findings uncovered from the Bank for International Settlements 2019 survey commissioned by the International Monetary Fund. In the survey, 70% of central banks expressed an interest in the research and potential use of digital currencies.
How Blue Swan Grading Helps Crypto Investors Keep Up With The Latest CBDC Updates
Regardless of whether central banks move forward with their plans, it’s clear that digital currencies are set to transform economic landscapes in the future by changing how people send and receive money.
Keeping up with the latest central bank digital currency updates can be tedious for the average crypto investor. This is where the right crypto market intelligence system comes in handy.
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