How China Lead the Race for a State Cryptocurrency
Digital currencies have made significant progress, and the underlying blockchain technology has been studied and tested by financial institutions worldwide. Now even central banks are trying to develop their blockchain-based solutions for the retail market.
What is CBDC?
Central Bank Digital Currency (CBDC) is a digital form of conventional fiat money and is under active development around the world.
At present, the People’s Bank of China has a project to create a digital renminbi. The financial regulator of the Netherlands declares its readiness to play a leading role in the development of digital currency, both domestically and within the eurozone. The US Federal Reserve, Bank of England, Bank of Japan, and the European Central Bank are exploring the possibilities of applying and developing this technology.
Why now?
The global pandemic has given an additional impetus to this trend. The Bank for International Settlements (BIS) recently announced that the coronavirus pandemic would accelerate the spread of online payments and update issues related to national digital currencies. His recent report states that COVID-19 is changing the public’s attitude toward cash, even though the prevailing opinion in the scientific community is that transmission of the virus through banknotes is unlikely. Members of Congress have also recently called for a “digital dollar.”
Moreover, central banks respond to challenges from private sector initiatives such as the Libra Association by Facebook. Also, CBDCs offer significant general-purpose benefits that make them very attractive for research and development. The digital nature of such currencies modernizes payments, making them more efficient and can lead to a more transparent retail payment system, reducing the volume of black-market trading.
What is the blockchain for?
Blockchain is crucial in the CBDC structure to ensure the tokenization of payment assets, to provide peer-to-peer transactions and distributed custodial services. Also, the blockchain includes atomic transactions, which means that any conditional payment scenario (for example, the delivery of a security in exchange for payment (DvP), can occur in real-time without the risk that one part of the transaction will be executed before the other.
Digitization of payment methods using the blockchain makes it easy to connect to the growing tokenized financial ecosystem. This may include speeding up and reducing the cost of cross-border payments and tying CBDC to other uses of tokens.
Besides, the blockchain is a structure of a more secure payment system, in which there is no single point of failure (SPOF) for hacker attacks.
China Leadership
China leads the world in the development of national digital currencies. The People’s Bank of China (PBoC) is already testing a new digital currency and is testing the necessary toolkit for its operation.
Recently, screenshots of the digital renminbi interface piloted by the Agricultural Bank of China (ABC), one of the four state-owned banking giants, have appeared.
PBoC sees the digital renminbi, or Digital Currency Electronic Payment (DCEP), replacing cash and making peer-to-peer transactions more secure and efficient. Technology will have great importance both for the Chinese economy and, possibly, for international politics. China hopes to increase the efficiency of its payment system, and the way trade is organized with international partners.
It also considers national digital currency as a proactive measure to preserve its monetary sovereignty. Facebook’s Libra and other possible private money projects could jeopardize China’s ability to control its economic system.
The race to create a new form of money has already begun, and according to Facebook, China is currently winning it. Facebook’s top manager David Marcus back in 2019 at a meeting of the US Senate on the Libra project warned that China would win if the United States gave no decent response to Chinese national digital currency within five years.
What will happen next?
Looking forward, we can imagine an entirely new architecture for money — a step as important as the invention of a credit card. Such changes can happen even faster than we expect. Thus, Marion Labour, an analyst at Deutsche Bank, believes that a group of central banks in the Eurozone, UK, Japan, and Canada will issue CBDC within the next three years. Ultimately, we are likely to see many uses for CBDC in retail.
Some central banks will issue CBDCs directly to the general public. In other cases, a financial institution with a central bank account may issue stablecoins backed by reserves. Also, it is of great importance how successfully the Chinese DCEP project is being implemented. How well the DCEP succeeds will have a lot to say about the future of money, monetary policy, and international trade.
