Back in 2019, the Bank for International Settlements (BIS) released a report from which it followed that 80% of all central banks are engaged in research or development in the field of state digital currencies – the so-called CBDC (Central Bank Digital Currency). In this article, experts from Boosty Labs, a P2P software development company, analyze the process of creating a national digital currency in China, the USA, and the European Union.
In 2020, the development of the CBDC market was significantly accelerated by the coronavirus pandemic, which led to an increase in the rate of digitalization of the economy.
However, only a few government financial regulators are preparing to issue a national digital currency in the next five years, according to The Block analysts. They also named the factors that are encouraging states to develop CBDCs: reducing costs in the financial sector, increasing access to financial services and new instruments of monetary policy. Which country is in the lead in the CBDC race?
DCEP is a leader in CBDC development
China remains the undisputed leader in the creation of CBDCs. The economy of this country is ready for the digitalization of cash. Already in 2018, the number of active users of the WeChat Pay payment application approached 1.1 billion people, and Alipay is the next – 900 million people. CBDC can become a government alternative to cryptocurrencies formally banned in China.
Rumors of the development of a digital yuan by the People's Bank of China (PBOC) have been circulating since 2015. The fact of work on it in 2018, with reference to representatives of the PBOC, was reported by the state news agency Xinhua. Then it became known that the digital yuan was called DCEP (Digital Currency Electronic Payment). In 2019, PBOC representatives said the asset was close to release.
According to analysts, the digital yuan project began to develop at an accelerated pace after the speech of the President of the People's Republic of China Xi Jinping in October 2019, which was dedicated to the national strategy for the development of the blockchain industry. After that, it became clear that DCEP is an important government initiative.
The first tests of the digital yuan
DCEP is the first CBDC project in a large country to enter the active testing phase. In April 2020, it became known about the beginning of experiments: then the first screenshots of the mobile application for the digital yuan appeared. The main features included a wallet, payment via a QR code (as in Alipay), receiving and sending transfers, as well as pairing wallets of two users for a transaction through the convergence of devices (probably using NFC technology).
The experiment took place on the territory of the new Xiong'an district, where residents gained access to a mobile wallet with small amounts of digital yuan. The four largest state-owned banks in China, as well as fintech giants Ant Financial and Tencent, are responsible for development of infrastructure of the coin. As a part of the first experiment, DCEP could be used in two dozen local cafes, supermarkets and entertainment companies.
In August 2020, the Chinese Ministry of Commerce announced that "field" tests of the digital yuan will take place in Beijing, as well as in cities in Hebei, Yangtze Delta, Guangdong and other areas. In addition, the authorities will actively use the digital yuan during the 2022 Olympic Games. In October, Chinese media reported that more than 3 million transactions, worth $162 million, had already passed through the DCEP system.
In addition to being used domestically, the digital yuan is also important for China's foreign trade, which is considered the largest exporter in the world. In August 2020, it became known that DCEP technical infrastructure is being tested to ensure that it will be able to carry out "bulk commercial transactions". As the developer of the coin, Mu Changchun, said in 2019, the use of the national digital currency in foreign trade settlements will help China "maintain monetary sovereignty." This refers to the digital yuan's replacement of the dollar, which remains the main currency of world trade.
Experts from the political science center Zero One Think Tank believe that the Chinese authorities can also use the digital yuan in large-scale foreign economic projects, such as The Belt and Road Initiative, an international initiative linking trade, transport and economic routes in more than 60 countries of Central Asia, Europe, and Africa.
DCEP design details
Although the digital yuan is already in circulation among ordinary citizens, the country's authorities have not yet disclosed details of how the digital currency system will be arranged. But now we can say that DCEP is likely to become a replacement for cash in the full sense of the word.
As stated in the aforementioned The Block report, the digital yuan will be a centralized cryptocurrency, as the issuance of DCEP and the operation of its main registry will be controlled by the PBOC. The regulator will also have information about all users of the system. According to the current concept, each digital yuan will have an individual number, similar to paper banknotes. Identifiers will become the basis of a digital ledger – it will be possible to track the movement of money using them.
The digital yuan system will be two-tier: the Central Bank will transfer DCEP emission to commercial banks, and those, in turn, will serve as wallet providers for citizens and organizations and serve the payment infrastructure.
Judging by the patents registered by the PBOC, there will be an element of anonymity in the digital yuan: various participants in the system will have limited information about each other, but at the same time, government agencies will be able to easily obtain the data they need.
It is safe to say that for the Chinese government, digitalization of the national currency is one of the main projects in the field of finance. Thus, speaking at the G20 summit in late November 2020, Xi Jinping urged other members of the organization from among the most developed countries to jointly "discuss the standards and principles of CBDC in an open and benevolent manner."
Meanwhile, the authorities of China's main economic rival, the United States, have not yet begun active testing of their CBDC. There is no single concept of the digital dollar in the United States either. In the fall of 2020, Rep. Bill Foster and French Hill urged the government to hurry up with the CBDC. In their address, they expressed concern that the dollar might lose its dominant role in the global monetary system due to DCEP.
In February, the research in the field of CBDC was confirmed by one of the governors of the Federal Reserve System (FRS). The head of the Fed, Jerome Powell, soon recognized this. He stressed that there are "many projects" in financial circles on the digital dollar, and the development of the CBDC remains an "open question" for the authorities.
The coronavirus pandemic forced the dollar to move more actively towards digitalization. So, at the end of March 2020, when a package of emergency measures to support the economy was discussed in Congress, the first version of the program proposed by the Democratic Party also included a bill on the digital dollar.
Technical Development of the Digital Dollar
On August 13, 2020, the Fed issued a press release in which it announced the start of the development of a technical platform for the digital dollar. It is supported by the technology division of the Fed, TechLab. The first experiment is planned to be carried out on the basis of the Federal Reserve Bank of Boston (part of the structure of the Fed), together with scientists from the Massachusetts Institute of Technology (MIT).
At the same time, the financial regulator emphasized that the project is aimed at exploring the possibilities and limitations of the technology, and not at creating a specific prototype.
On the same day, Forbes published an article about a webinar with the participation of the FRS representatives responsible for the development of the CBDC. One of them – Lael Brainard, a member of the Fed Board of Governors – noted that the digital dollar can be used in the private sector. This was perceived by observers as a signal that the American CBDC will become a replacement for cash dollars.
In May 2021, Lael Brainard said at the Consensus conference that the US Federal Reserve is expanding its work with central bank digital currencies (CBDCs) with a focus on financial and geographic integration. She stressed that four factors amplify the Fed's attention to the new instrument: the growing role of stablecoins, the transition to digital payments, the use of foreign CBDCs and the risks of financial isolation.
When asked about the impact of the Chinese factor on the speed of the US movement towards new digital assets, Brainard replied that any development of cross-border payments could potentially have implications around the world.
In the next quarter of 2021, the Fed will launch public consultations on proposals for a possible digital dollar, she said.
Closer to the release of the CBDC than the US, but farther than China, is another world economic center – the European Union. There, the process of developing the digital euro by the fall of this year moved from purely theoretical work to the definition of specific dates for the start of tests.
In September 2020, the head of the European Central Bank (ECB) Christine Lagarde said that the development of the digital euro was also accelerated by the pandemic: in the first six months of 2020, e-commerce sales in the EU grew by 20%, while overall trade turnover fell slightly. Lagarde expressed support for the very idea of ??CBDC, as it will allow faster and cheaper payments.
In October, the ECB released a big report on the digital euro. In it, the regulator stressed that CBDC will not replace cash, but will become an addition to it. The experts of the Central Bank also identified possible scenarios in which the issuance of a digital euro would be required. Among them:
Increased demand for electronic payments;
Reducing the use of cash;
Launch of private currencies;
Issuance of CBDCs by central banks of other countries.
However, in November, Christine Lagarde changed her rhetoric and said that the EU authorities were in no hurry to become the first in the race for CBDC.
In April 2021, Christine Lagarde announced that the ECB could issue the digital currency in four years if politicians approve the project.
In the near future, the ECB will publish an analysis of 8,000 responses received as part of a public consultation on a potential launch of a central bank digital currency (CBDC). The document will be sent to the European Parliament.
In mid-2021, the Governing Council of the ECB will decide on further practical experiments with the digital euro, Lagarde said. According to her, the decision to implement CBDC will be made in six months or a year after that.
Two or three years ago, CBDC was spoken of as an idea, but in 2021 the world is already very close to its implementation. The pandemic finally made the digitalization of the economy inevitable, and the success of cryptocurrencies raised the issue of digitalization in the light of discussions on the effectiveness of the current monetary system.
For thousands of years, money was present only in physical form. CBDC promises to be the first truly stable and customizable fully virtual money system.
At the same time, it is already clear that CBDC will become at least a short-term “shock” for the global economy: inflation, the crisis of commercial banks, de-dollarization.
But, apparently, the advantages still outweigh the disadvantages, including for ordinary users. After digital currencies start working in large economies, we will be able to see their true potential, and this can happen as early as next year.
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