While most central banks in the world are only studying crypto-currencies and digital currencies, China is multiplying experiments on the ground with a new digital renminbi (DRMB).
“The experiments started last year in four big cities, and now it has spread to 14,” reports Chi Lo, senior economist at BNP Paribas, in Hong Kong. “I don’t expect it to be launched nationwide for at least another year or two, but already, this puts the People’s Bank of China way ahead of other central banks in the world.”
A survey carried out in late 2019 by the Bank for International Settlements (BIS) indicates that “while 80 percent of central banks are engaged in some sort of digital currency research and development, only 10 percent have progressed to pilot projects, notes Mark Kruger, a senior fellow at the Yicai Research Institute, in Shanghai. “Moreover, 70 percent of the banks say that they are unlikely to issue digital currencies, even in the medium term.”
Developments elsewhere indicate opposite trends. Data from the BIS, reports Kruger, “shows that the ratio of banknotes and coins in circulation to GDP is rising in the United States and the euro area. However, it is falling sharply in China, where consumers are abandoning cash for mobile payments made via their cell phones. The two dominant platforms — Alibaba’s Alipay and Tencent’s WeChat Pay — had 890 million users in 2018.”
The presence of these ubiquitous payment platforms greatly facilitates the diffusion of a digital renminbi (DRMB), agree the analysts Morningstar spoke with. Once the digital yuan rolls out, it will almost be imperceptible to Chinese consumers who already make most of their commercial transactions seamlessly through their cell phones without ever seeing a paper banknote.
“Things can move very fast, says Lo. The Chinese are very receptive to digital currencies, especially since China leapfrogged credit cards, and since the People’s Bank of China (PBOC) doesn’t have to contend with a credit card lobby, as monetary authorities have to elsewhere.”
Of course, things are also greatly facilitated by the fact that China is a command-and-control centralized economy. It doesn’t have to deal with the legal wrangles of an independent private sector. Other countries have to strike a balancing act between total anonymity, as cryptocurrencies like Bitcoin put forward, and an attempt at keeping a centralized control.
Four key features distinguish the DRMB, as detailed by Andrew Work, editor-in-chief of the Harbour Times, in Hong Kong, and director of the Lion Rock Institute. It will be centralized at the outset and is in no way a cryptocurrency. The blockchain community contends that digital currencies “are not genuine cryptocurrencies and their nature contradicts the original vision of the benefits of having cryptocurrencies in the first place – freedom from political interference leading to inflation, economic control and a lack of privacy,” Work states.
Furthermore, the DRMB is not based on the distributed ledger technology of blockchain, and it will not require the Internet to operate. For example, two individuals who want to pay each other in a closed room will simply move from one phone to the other via Bluetooth amounts of DRMBs that they will have previously downloaded from their bank accounts.
The PBOC speaks of a “controllable anonymity”, notes Mark Kruger. “Currently, he adds, consumers must provide personal information to access the Alipay and WeChat Pay payment systems. Small-value transactions will be, essentially, anonymous. However, the PBOC is looking to strike a balance between the public’s desire for privacy and the need to prevent money laundering, terrorism financing and tax evasion. This will be done by limiting the size of the digital wallets and setting limits on the value of transactions that can be made in the absence of providing personal identification.”
“Most other central banks face a key issue: how to avoid financial disintermediation (through some digital or cryptocurrency), highlights Lo. Because there’s a possibility that depositors might move to the digital currency and discard the fiat currency. China addresses that from the beginning by pegging the DRMB to the paper yuan.” In other words, banks that distribute DRMBs will be required to hold equivalent amounts in hard currency yuans. For every digital yuan moving around, there will be a “cash” one registered in a bank.
Libra Could Have Set off China
Facebook’s Libra crypto-currency project acted as a major incentive on the PBOC to launch the DRMB, believes Lo. Though the Libra would not have been pegged to the US dollar but rather to a basket of currencies, the PBOC saw it as a threat that would strengthen the hegemony of the greenback. And all three analysts recognize in the DRMB an attempt to undermine, or at least, evade this hegemony.
As Kruger points out, the DRMB aims at countering money laundering, tax evasion and other illicit activities, aims to which Work adds many others: internationalization of the renminbi, gain some seigniorage advantages currently enjoyed by the US as the issuer of the dominant world currency, and controlling monetary policies of regional economies that have widespread adoption of the renminbi.
But the main driver of the DRMB, believes Work, is the ability “to provide unlimited government visibility into domestic financial transactions. The day to day use of a digital renminbi will not the hunting down of political dissidents, but rather exerting capital controls, reigning in shadow banking and corruption,” he says.
The DRMB, Work highlights, will be “programmable”, which will be extremely useful in implementing “smart contracts”, but also in controlling citizens who get out of line, for example, by blocking selectively any transaction to buy alcohol or plane tickets.
The digital technology that allows nearly unlimited traceability of individuals is already widely prevalent in the West thanks to social media and credit cards. However, laws do protect privacy, which is much less the case in China. Though the infamous “social credit” monitoring system has not been implemented widely, signals Work, DRMB monitoring could be integrated into such programs.