Amidst the disruptions of COVID 19, Chinese government has announced a digital currency, the Chinese Renminbi-RMB, stirring intense speculation.
INTRODUCING THE E-RMB
The People's Bank of China (PBOC) is all set to become the foremost major central bank to release a digital version of Yuan, the official Chinese Renminbi-RMB. Seeking to match and control an increasingly digitised economy, the e-RMB Chinese is set to be the first digital currency operated by a major economy.
The renminbi is the official currency of China. The Yuan is the basic unit of the renminbi but is also used to refer to the Chinese currency, especially in international contexts. China's economic rise has been matched by the growing strength of the Yuan over the years. The International Monetary Fund (IMF) has classified it as the fifth most used currency and included the Yuan in its Special Drawings Rights which is its formal hard currencies basket, together with the US dollar, Euro, Japanese yen, and British pound sterling. The growing global importance of the Yuan has been progressive, and Beijing has begun looking for alternatives to strengthen its global financial position further.
Thanks to COVID-19, a decline in cash usage is likely, and therefore this may be the most opportune moment to release the e-RMB. It is being reported that from May onwards, government servants would be paid in the digital currency. Trials of the new digital currency will commence in four major cities soon including Shenzhen, Suzhou, Chengdu, as well as a new area south of Beijing, Xiong'an. It is being claimed that multinationals like McDonald's and Starbucks have been invited to participate in the trials. Starbucks has denied the same.
EVOLVING THE DIGITAL FIAT CURRENCY
In their search for an alternative to paper currency, but wary of foreign-owned cryptocurrencies, Chinese have been working on their own digital currency. They have been encouraged by the tremendous popularity of digital transactions. Electronic payments are already ubiquitous in China, and the public is doing away with cash transactions. Popular digital payment platforms like WeChat Pay and Alipay handle payments worth trillions of dollars every quarter but do not replace existing currency.
Peoples Bank of China (PBOC) 's Digital Currency Institute, continuing the Chinese goal of financial growth and innovation, had begun designing a state-backed cryptocurrency in 2014 with a deadline of Nov 2019. The project had been named the Central Bank Digital Currency (CBDC). It was planned for the CBDC to serve as legal tender like a country's sovereign currency. Like the Yuan, it would be backed by the reserves of valuable assets that commercial institutions deposit in the central bank.
WHAT MOTIVATES CHINAS DRIVE FOR E-RMB
Currency promises to be not only an economic issue but also one regarding sovereignty. China wants to manage financial growth in the technology sector, but on its own terms. China was well aware that other players were also coming up with digital currencies, most notably being Facebook's Libra which was scheduled for a 2020 launch. Libra will be backed by a number of independent currencies with the dollars making up 50% of the nest. PBOC fears the Libra will increase the US dollar's influence in the financial system globally.
Most global central banks and are involved in theoretical and conceptual research of digital currency. Some countries went ahead and launched pilot projects like Uruguay's e-Peso, Venezuela's petro and Sweden's e-krona. In 2009, Bank of England Governor Mark Carney had also supported the creation of a Libra-like reserve currency to end the dollar's dominance.
The existing crypto-currencies are unreliable, lacking monetary sovereignty and rapidly fluctuate in value. All crypto-currencies' had been banned in China by 2018 and all platforms dealing with the same had been shut.
Facebook's proposed Libra has generated the most interest. It would work as a multilateral derivative as its value will depend on multiple Western hard currencies. Libra is being regarded with trepidation as it may render state currencies unimportant. Theoretically, Facebook would be able to hoard government bonds and end up becoming a major creditor of states, according to the Bundesbank executive board. The Deutsche Bundesbank, the central bank of the Federal Republic of Germany, has predicted that "If, of the 2.7 billion Facebook user, even only 100 million joins, Libra would have more customers than the entire German banking market."
The Chinese CBDC is unique from other digital currencies in that it will have the state's monetary sovereignty unlike Litecoin, Bitcoin and Ethereum, which are decentralised and thus stateless. China's state-backed, Yuan-based and centralised CBDC will not be dependent on any other value. It will give China the freedom of not having to depend on a standard cryptocurrency like Bitcoin or a stable-coin like Libra, which are both controlled by stateless parties. Chinese digital currency will not be a cryptocurrency which uses blockchain to verify and maintain records and allows for transfers without the involvement of a bank.
The reason to not use blockchain stems from the fear that it may not be able to support a large number of simultaneous transactions. China's annual Singles' Day shopping festival in 2018 was 92,771 transactions per second. This is far above what any blockchain can support.
As per PBOC, to start with the CBDC will be for domestic use only. Its use as an international tender will require coordination and acceptance. At some future date, it may, as per Chinese statements facilitate "integration into globally traded currency markets with a reduced risk of politically inspired disruption."
As per a report published in the Guardian newspaper, a principal motive for introducing the e-RMB could be to counter "dollar weaponisation" and to offer investors and business partners an alternative to dollar settlements.
A high-level Indian government panel on virtual crypto-currencies has recommended a ban on all virtual crypto-currencies in India. The main attraction of a digital currency stems from the fact that it allows the settling of international payments without involving the US dollar. While reservations about crypto-currencies stand valid, a state-backed digital currency may go a long way in yielding good economic results. Mobile payments applications like PayTM, UPI and PhonePe have gained extreme favour in the country already. With China moving forward with the CBDC, its impact on global finance will only increase; something India should regard with caution.
- CBDC will prove to be monumental in increasing via cyberspace the reach of Chinese financial circuits. Chinese businesses will be able to create trade partnerships globally with counterparts in a manner that bypasses American dollars dominance.
- CBDC is poised to play a significant role in furthering China's Belt and Road Initiative by implementing 21st-century trade parameters to it. Payments both from and to China with other countries will become direct and controlled by the PBOC.
- Geopolitics affects all walks of life; its entry in the field of crypto-currencies is not unexpected. Digital currency combines monetary, technological and economic factors with politics. Active participation of Chine in this realm indicates its growing importance and also marks it as the next competitive arena. A sovereign digital currency blunts the impact of any sanctions or threats of exclusion.