white papers

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.

 

important information.

This document has been issued by Lombard Odier Funds (Europe) S.A. a Luxembourg based public limited company (SA), having its registered office at 291, route d’Arlon, 1150 Luxembourg, authorised and regulated by the CSSF as a Management Company within the meaning of EU Directive 2009/65/EC, as amended; and within the meaning of the EU Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD). The purpose of the Management Company is the creation, promotion, administration, management and the marketing of Luxembourg and foreign UCITS, alternative investment funds ("AIFs") and other regulated funds, collective investment vehicles or other investment vehicles, as well as the offering of portfolio management and investment advisory services.
Lombard Odier Investment Managers (“LOIM”) is a trade name.
This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.
Neither this document  nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Funds (Europe) S.A prior consent. ©2020 Lombard Odier IM. All rights reserved.