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    China leading the move to a digital currency

    China leading the move to a digital currency
    Christian Vondenbusch - Portfolio Manager

    Christian Vondenbusch

    Portfolio Manager

    The world is rapidly moving towards a fully cashless society. We see Central Bank Digital Currencies (CBDCs) as the logical next step in the digitisation of money and China is currently leading the way.

    A CBDC is a highly secure digital instrument which is created and backed by a central bank. It represents a claim directly against the central bank which would use a database run by the central bank or government. This database would keep track of the amount of money held by every entity, corporate or individual. About 80% of 66 central banks are currently working on CBDCs.

    CBDCs would keep central banks in control of the amount of currency in circulation and ensure the stability of the financial and payments system as a whole. Furthermore, it would help governments prevent illegal activities and tax avoidance as central banks can keep track of the exact location of every unit of its currency.

    The advantages of CBDCs compared to the current system are their efficiency and speed, security, and reliability. They stand to further help financial inclusion by allowing any citizen to be provided with a free or low-cost basic bank account at the central bank. They could also dramatically improve cross border payments efficiency.

    While it probably takes some time for western countries to introduce digital currencies, live trials are already taking place across four cities in China. In April 2020, the Digital Currency Electronic Payment (DCEP) began its test in Shenzhen, Suzhou, Xiong’an, and Chengdu. The People’s Bank of China (PBoC) has said that the digital currency could be available in time for the 2022 Winter Olympics, which is scheduled to be hosted in Beijing.

    The digital Yuan will be issued and backed by China’s government while stored in a digital wallet app instead of a bank account. By using their digital wallet, consumers will be able to execute daily transactions, such as payments for goods, sending and receiving money from others, and making transfers via ATMs. This means that the digital Yuan will be a part of the most liquid form of money supply, also known as M0, replacing some portion of coins and notes in circulation in the economy.

    Different countries migrate towards digital payments over diverse timeframes. There is a deep-seated social component to cash payments because of their daily use. This can lead to a very gradual transition period to digital payments, even when the technology infrastructure is present. With no legacy infrastructure and a very technology-savvy population, mobile payments have grown very rapidly in China over the last decade. This has resulted in some of the highest digital payments penetration rates worldwide. With China already the leader in mobile payments, we expect them to also take the lead on setting the standard for CBDCs.

     

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