World awaits digital currency breakthrough

Nation accelerates blockchain technology development

This year, as the world eagerly awaits news of the first government-issued digital currency in a major economy, eyes are turning to China, which is accelerating development of blockchain, the underlying technology required for e-money.

The top-level design of China’s central bank digital currency

In the past 12 months, all announcements by the People’s Bank of China, the central bank, about updates to its proposed digital currency have attracted global media attention.

No matter which large economy it is generated in, the world’s first central bank digital currency, or CBDC, will change the basic rules of the global monetary system.     

“The top-level design of China’s central bank digital currency, as well as the standards and testing processes, have almost been completed,” Mu Changchun, director-general of the central bank’s Institute of Digital Currency, said in December.

The next step is to choose pilot areas for testing, including the application scenarios and scope of service, to optimize and enrich the functions of the digital yuan and promote research on this form of money, Mu said.

There will not be an exchange for trading digital currency and electronic payments, or DC/EP, as is the case with other crypto-assets, Mu said. “The digital yuan is for spending, not for speculative investment.”

In 2014, the central bank started to research a digital currency. Two years later, it opened the Institute of Digital Currency and in 2017 established a special work team to experiment with DC/EP.

Money: Global headlines prompt complex questions

In 2016, a paper from the PBOC Digital Currency Research Group was published in the central bank magazine China Finance. The paper stated that in the early stages of launching DC/EP, “one or two closed-application scenarios, such as the commercial bill market, can be selected (as a pilot),” and then use of DC/EP can later be expanded to the whole country.

The paper said: “We should realize that the use of both digital money and cash will run parallel for quite a long time,” with the former gradually replacing the latter. “Later, the transaction costs for cash will gradually rise. For example, there may be a charge for cash withdrawals. Thus, with an incentive mechanism, more people will prefer to use digital currency.”

However, behind many of the global headlines, complex questions about CBDC have been raised in relation to monetary policy, central banking operations and payment systems, as well as financial stability and legal foundations and regulations.

International Monetary Fund experts Tommaso Mancini-Griffoli and Tobias Adrian wrote in an article on the IMF website in December, “We have seen an increase in central banks’ interest in CBDC following the announcement by Facebook of its Libra initiative as well as reports of a possible launch of a CBDC by the PBOC.

“Each country will have to weigh the pros and cons of the case for CBDC depending on its particular circumstances.”

According to PBOC officials, the operating framework for DC/EP will be a two-tier structure, involving the central bank and some nongovernmental institutions jointly running the system.

World awaits digital currency breakthrough
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