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China’s winning CBDC approach

Summary:
Gary Smith has a nice piece in OMFIF on how Chinese recently used lottery approach to push the CBDC: Will China’s central bank digital currency experiment be a success? Offering 50,000 Shenzhen citizens a wallet containing around in a lottery has created momentum. Banning the prospect of any other form of digital money and adopting a rigorous approach to encouraging retailer acceptance has been helpful. The citizens of Shenzhen were ready for CBDC – 2m applied to participate. The architecture of money is changing. The pandemic has led to a collapse in the use of cash around the globe. A desire to avoid touching notes and coins has combined with the expanded availability of cashless payment options in shops and a surge in online shopping. Central banks everywhere have been jolted

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Gary Smith has a nice piece in OMFIF on how Chinese recently used lottery approach to push the CBDC:

Will China’s central bank digital currency experiment be a success? Offering 50,000 Shenzhen citizens a wallet containing around $30 in a lottery has created momentum. Banning the prospect of any other form of digital money and adopting a rigorous approach to encouraging retailer acceptance has been helpful. The citizens of Shenzhen were ready for CBDC – 2m applied to participate.

The architecture of money is changing. The pandemic has led to a collapse in the use of cash around the globe. A desire to avoid touching notes and coins has combined with the expanded availability of cashless payment options in shops and a surge in online shopping.

Central banks everywhere have been jolted into action. It seems inevitable that the squeeze on cash will trigger multiple CBDC initiatives. Many will share some of the technological characteristics of cryptocurrencies like bitcoin, but will differ in three important ways. First, CBDC will probably exist on a centralised platform, and therefore will be subject to government oversight. Second, it will be denominated in the local fiat currency at a constant value. Third, CBDC and domestic cash will be interchangeable.

State ownership of banks helps push the CBDC:

Nowhere is resistance to CBDC greater than in the US, and that is in part because the commercial banking lobby is strong. Commercial banks are concerned that their role as deposit takers could be undermined by a CBDC that would be ‘gilt edged’. This would weaken their role in the money creation process. Federal Reserve Governor Jerome Powell has defended the slow pace on CDBC by arguing that the US payments system works effectively.

China does not have private sector banks. All have some degree of state ownership, so there is no comparable lobby pressure. Most Chinese consumers have never known banking that was not via a mobile device, and already have limited expectations of privacy. In short, as evidence from the lottery scheme in Shenzhen suggests, China is an ideal testing ground for CBDC.

Four state-owned banks will distribute the digital renminbi, known as the digital currency electronic payment. They will therefore be integral to its existence. There are concerns about commercial banks being disintermediated, but there are suggestions that the People’s Bank of China could re-lend DCEP deposits to the commercial banks. This would give the central bank even more oversight (and perhaps control) over the use of DCEP in the Chinese economy.

The fact that the Shenzhen lottery wins could be cancelled if not spent highlights that CBDC could be a useful monetary policy tool. Crisis support payments could be targeted at those citizens in most need, with immediate effect, rather than written on cheques and mailed to citizens (some of whom were dead) as was the case in the US earlier this year.

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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