The digital renminbi is a currency issued by China’s central bank, the People’s Bank of China (PBOC) and is the first digital currency to be created by a major economy and a nation, and, in April 2021, it started undergoing testing on the public. Also known as ‘digital RMB’, ‘e-CNY’, or ‘Digital Currency Electronic Payment’, it is legal tender and has equivalent value with other forms of currency such as bills and coins. It is a bold move by the Chinese and being the first into the field will come with challenges and advantages. Is it a glimpse of the future?
Ten centuries ago, back when currency was largely lumps of metal with a variety of different images etched upon it, China took a step forward and invented paper money. A thousand years later, the Chinese are taking intrepid steps forward again by creating their own national cryptocurrency. In 2014, the PBOC began research on digital currency under the supervision of Governor Zhou Xiaochuan. By 2017, the State Council approved development of the digital RMB. Chinese tech firms such as Alibaba, Tencent, Huawei, and JD.com, were invited to collaborate with the central bank to develop and test it.
A Changing Landscape
To the uninitiated, it might already feel as though money has shifted from the tangible to the binary. This is understandable since where we already had debit and credit cards (that embraced chips latterly), we now have Apple Pay and WeChat where payment can be made directly from our devices. But don’t be fooled: this is only a means by which to move what is known as fiat money contained in a given account. Genuine digital currency is encryption code and truly only exists in the world of the digital. Cryptocurrencies have had a rollercoaster of a ride since their inception, and their reputation has been living in the shadow of bitcoin, a currency that only qualifies as property, since it is not legal tender (other than in El Salvador). Nonetheless, it has made some people extraordinarily rich, and the speculation having occurred as a result of the volatility of bitcoin has spilled over on to the wider cryptocurrency market.
Figure 1: From the People's Bank of China (PBOC) white paper (in English) of the digital renmimbi.
In contrast, Digital Renminbi will be issued by China’s central bank which will make it legal tender. What with the Chinese government backing the currency, it will be able to create means by which to administer it and enable the monitoring of people as well as the economy. One of the main issues this addresses, and described by James T Areddy in the Wall Street Journal, is that of anonymity. With traditional cryptocurrencies, the anonymous nature of it has always caused headaches for governments over such things as tax, regulation, analysis, and illicit use like money laundering. The Chinese government, by issuing the currency itself, can introduce all manner of stipulations by which users will have to abide, and in one fell swoop will neutralize many of the challenges of conventional cryptocurrencies. A user will have to agree to pseudo anonymity rather than complete obscurity.
Recalibration
Back in October 2020, China Banking News reported how the digital RMB will be ‘set for new trade-related application trials in the financial center of Shanghai’. This referred to testing with applications relating to trading in small amounts as well as supply chain financing. Up until recently, backing for these kinds of digital currency has been notoriously sparce, and it is primarily for this reason that the range of the use of such currencies has remained small. The thinking now, is that small and medium-sized enterprises (SMEs) embedded within the supply chains of a given sector, will be able to benefit by a newly acquired ease of trade settlement. More accessible locating and collaborating with partners in financing their operations should go hand-in-hand with the cryptocurrency.
More than this, because of the advantages inherent in a government-backed cryptocurrency, the Chinese are hoping that aspects of the international community will adopt it and expand its global appeal. The trials mentioned above have incorporated the cities of Shenzhen, Suzhou, Xiong’an, and Chengdu, and the Chinese government have already stated that the currency is ready for deployment (back in September 2020). Chinese authorities have also announced their intention to introduce the use of the currency at the 2022 Beijing Winter Olympics. In the long term, there is also some nervous admissions that the digital renminbi may make significant moves to dislodge the USD as a reserve currency, something that would be somewhat of a recalibration of the broader global economy (although this may be a far-fetched and/or very long-term outcome).
Dislodging
Overall, the digital renminbi is hoped to protect the sovereignty of the Chinese currency as well as its legal status. It will also allow for a controlled type of anonymity, so that the government can still govern effectively and supervise the economy. This will be achieved through providing anonymous payments while at the same time preventing financial crime such as money-laundering and terrorist-financing and expand the use of renminbi internationally (especially into countries that have been sanctioned by the US). Further to this, the currency will also remove banks from the cash ecosystem so that the central bank can operate directly with customers making transactions more efficient. The government too, will have finite control in financial crises, so that cash can be distributed more widely and faster, and provide finance to be spent only on specific goods or services.
It seems there is a plan for the digital renminbi to replace third party cryptocurrencies. A logical assumption made by some because of the Chinese government’s clamp down on ICOs in 2017 and its plans to come down hard on cryptocurrency exchanges. Interestingly, and pointed out by Alamira Jouman Hajjar for AI Multiple, the digital renminbi will use the same blockchain technology employed for cryptocurrencies but will be utilized in a central manner. For many involved in the cryptocurrency sector, the entire point of having cryptocurrencies is their ability to remain free of management, to be decentralized and owned by all. It is a grossly poignant aspect of China’s government that it may well be looking to use the digital RMB to strengthen its grip on the populace rather than grant it greater freedoms. That would be a more cynical assessment for sure. Either way, time will tell.