Thanks to the explanation in the paper highlighted today from Shen Wei and Liyang Hou, both of the Shanghai Jiao Tong University, I now understand why China’s version of a Central Bank Digital Currency (CBDC), or the Digital Currency Electric Payment (DCEP), may be a damp-squib.
They point out that Central Banks in general have not been enthusiastic boosters of CBDCs with the Bank of England and the Danish Central Bank standout skeptics.
One of the main issues is the use of cash in most economies has been declining nicely and of its own accord for some time. At point of sale in Zara, for example, now there are up to a dozen options for settling your purchases if you choose not to hand over grubby-folding.
Yes, it would help to eliminate some kinds of criminal activity if the Central Bank had an electronic tag on all transactions in an economy but speeding up cash might also bring with it the risk of more financial system destabilization. For example, what if rather than queuing up for your money in the event of a bank run you could just ‘ping’ it to another party?
Back to the real world though for a moment. What is it that a CBDC or DCEP would do that isn’t happening already? Moreover the real problem with China’s plans is that it intends to let banks issue these BUT, and it’s an ENORMOUS BUT, they want 100% backing, 1:1 with deposits at the Central Bank. This would constrain bank’s balance sheets and there isn’t a banker in the world who would willingly vote for or promote that.
Bottom line. China is going to push ahead with plans they’ve been gestating since 2014 and, in fact, already officially introduced their DCEP-Yuan in April 2020, so the die appears cast.
Game changer? It most likely isn’t; and whether it’ll prove to be more than a Darwinian financial-markets evolutionary dead-end seems unclear.
The (an easy 18-pages) paper in full can be accessed via the following link China’s CBDC: Game Changer or Regulatory Toolkit?.
Happy Sunday.