Experts from the Chinese Academy of Social Sciences (CASS) and the National Institution for Finance & Development (NIFD) see the digital renminbi having a transformative impact across a broad range of economic areas.
A paper written by Huang Guoping (黄国平), chair of CASS’s Investment and Finance Research Centre, and Li Wanrong (李婉溶), researcher from the Investment and Finance Research Centre of NIFD, says that China’s central bank digital currency (CBDC) will first and foremost have a transformative impact on both the banking and payment sectors.
In the banking sector, Huang and Li see CBDC having impacts for reasons including:
- CBDC’s reduce monetary friction and expedite competition. “Digital currency will reduce dependence upon bank counters, automatic teller machines and other physical installations, removing the physical boundaries for fund transfers, and making cross-institutional fund transfer more quick and convenient. This will require commercial banks to reduce costs and strengthen differentiated service capability.
- Digital currency will transform banking sector business models. “The digitisation of physical cash will lead to major changes to the payments models and behavioural habits of customers, as well as bank fund operations and management models, requiring that banks promptly adjust product structures and service structures. Additionally, the digitisation of statutory currency will transform the monetary and financial environment, integrating with even more financial infrastructure and providing a shared financial environment to innovations in transaction mechanisms.”
- The digitisation of the renminbi will compel banks to restructure their systems investments. “Following changes to the monetary and financial environment and operating models, current operations support systems, production environments and personnel systems must all be re-shaped and integrated. The risk categories of bank operations will also change, with IT risk and digital compliance risk requiring that banks make corresponding reforms to risk management systems and mechanisms.”
The paper expects the impact of digital currency on third-party payments providers to be more direct, given that non-interest bearing digital currency itself functions as a type of “advanced payments and settlements tool.”
“Compared to other electronics payments mediums, central bank digital currency possesses marked advantages,” said the paper, pointing in particular to improved efficiency and security in tandem with lower cost, as well as broader coverage given that CBDC is a form of “public financial infrastructure.”
“Following technological development, the digital renminbi will gradually become a public payments and settlement tool that plays a fundamental role in the payments system, with other third party payments serving as personalised payments and settlement tools, and catering to differentiated application scenarios or other associated added-value services,” said the paper.
“This will form a payments ecosystem that operates excellently, with each fulfilling its function and holding its owns.”
The paper also sees CBDC enhancing the effectiveness of monetary and macro-economic policy across a range of areas:
- CBDC can expand the central bank balance sheet and enhance its direct influence. “At present the central bank does not engage in operations in non-financial areas, and monetary policy is mainly transmitted via financial intermediary institutions such as commercial banks. The launch of the CBDC ensures the necessary existence of statutory currency in circulation, and provides the foundations and protections for the effective execution of monetary policy, as well as provides the possibility for members of the public to enter the central bank balance sheet.”
- CBDC can strengthen the “operability” of monetary policy, particularly with respect to interest rates. “Via the adoption of suitable design, CBDC can remove the problem of a zero floor on effective interest rates, and during economic slumps or crises ensure that interest rate policy plays its role effectively, averting the liquidity trap.”
- The digitisation of the renminbi provides for more “precision adjustment and control.” “On the one hand, digital currency provides firm foundational data for targeted adjustment and control. Based on digital technology, the central bank can rapidly track and monitor all digital currency issued, and obtain historical transaction data on the entire lifecycle of digital currency, effectively measuring currency flows and turnover rates, and collecting statistics on the total volume of money and the monetary structure.” The paper further points out that Chinese regulators will be able to “make use of big data technology to understand currency saving and spending behaviour; collect payments data on a broad range of social and economic entities, analyse private sector consumption and investment behaviour, and provide higher quality data foundations for the formulation of monetary policy and economic adjustments.”
Huang and Yi expects CBDC to expedite financial regulation by means including:
- The formation of a “closed circuit” for the circulation of funds and controlled anonymity and tracing, which strikes against financial fraud.
- Reductions in regulatory costs and improvements to regulatory efficiency, with CBDC providing a “comprehensive ledger that can be tracked.”
- CBDC provides an excellent foundation for the use of fintech and regtech methods including big data, cloud computing and artificial intelligence.