China’s Central Bank Digital Currency

In an announcement this month that went under the radar due to the US-China trade war grabbing the headlines, the People’s Bank of China (PBoC) announced that the country was ready to launch its digital currency or a Chinese Central Bank Digital Currency (CBDC). While lot of details have not been revealed in most US media outlets that carried the announcement, a Chinese securities website post has more details and the whereabouts of that source is credited to an article on Daily Fintech website.

The announcement is surprising because of two reasons; first because China has in the past not taken a positive view on cryptocurrencies and the whole concept of Bitcoin is the antithesis of the Chinese government’s view on control over the economy. Second surprising element in the announcement is that the PBoC mentioned the central bank digital currency (CBDC) was being worked on for 5 years which would make it one of the first CBDC projects to have started and then be kept secret for such a long time which is unusual in the world of crypto’s.

China is not the only country experimenting with digital currency as previously mentioned however the most distinctive feature of China’s CBDC will be that it will have two tiers; the PBoC will be in the top tier and issue the CDBC to commercial banks and then the commercial banks will form the lower tier and ‘face the public’. The Chinese securities website mentions a number of reasons for this structure with the core theme being to avoid any financial disintermediation and this fits a broader pattern of China introducing innovations without causing disruption in order to avoid any social unrest and is similar to how China opened up it’s economy to the world in incremental steps with the government having full control in all stages.

As far as motivation for announcing a CBDC by China, it cannot be a coincidence that this announcement was done on the back of Facebook’s announcement of Libra which will have it’s reserves in number of currencies with the USD presumably having more weight than the Chinese Renminbi. The PBoC has also taken the unusual step of being publicly critical of Libra and it’s impact on domestic currencies with the claim that it will  “worsen the financial situation of the poor”. The second motivation could be the ongoing US-China trade war with the latest salvo of China being labelled a currency manipulator by the Trump administration as contemplated in the article by the Daily Fintech.

This space of digital currencies; FX manipulation and trade wars will never be the same if China carries out the announcement as intended and we have to stay tuned for the next episode in this saga.

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