During the recently held BIS (Bank for International Settlements) Innovation Hub seminar, People’s Bank of China (PBOC) Director-General Mu Changchun laid out new proposals for CBDCs.
“Interoperability should be enabled between CBDC (central bank digital currency) systems of different jurisdictions and exchange,” Mu opined. The PBOC had shared its set of proposals with other central banks and monetary authorities, the official said.
Central bank digital currencies (CBDCs) have been at the forefront of innovating the functions of a central bank. A CBDC works much like how cryptocurrencies work in that they are digital payment instruments, except they are denominated in the national unit of account, say, like a digital dollar, or a digital pound sterling, or a digital Euro.
CBDCs, however, should be differentiated from private stablecoins like USDC, Tether’s USDT, or Facebook’s forthcoming Diem stablecoin. These are pegged on private ledgers owned by companies. CBDCs, on the other hand, are public digital or digitised fiat, currencies which are controlled by central banks, which are in turn officiated by sovereign states.
While Bitcoin and other cryptocurrencies are decentralized in nature and are algorithmically controlled, they were also developed by the private sector, and as such are beholden to the companies and users they serve. CBDCs, on the other hand, employ the same distributed ledger technologies like blockchain which cryptocurrencies use, and implement these protocols through centralized mechanisms.
According to Mu, critical infrastructural issues such as monitoring and information sharing must be prioritized in terms of development, if central banks aim to modernise their financial systems, keep up with the supposed competitive threat of cryptocurrencies such as Bitcoin, and hasten domestic and international payment channels.
“Information flow and fund flows should be synchronised so as to facilitate regulators to monitor the transactions for compliance,” Mu said. “We also propose a scalable and overseen foreign exchange platform supported by DLT (distributed ledger technology, e.g., blockchain) or other technologies,” he added.
Being one of the most advanced central banks in terms of research and current development, the PBOC is positioning itself to become the first major central bank to issue a CBDC, a move aligned with its current campaign to internationalise the yuan, China’s base fiat currency, and thereby reduce the Chinese monetary system’s dependence on the dollar-dominated global banking system.
Notably, China is the first major economy that has taken a decisive turn for CBDC implementation. Its Digital Currency Electronic Payment (DC/EP) programme is already being piloted in a number of Chinese cities.
In a recent survey held by the BIS, it was revealed that out of the 60 participating central banks, 86% have already begun exploring or developing their own CBDCs.
In the eurozone, the European Central Bank is already exploring how it can introduce the digital euro within a five year stretch. However, it does not come forward without opposition. Germany’s Bundesbank has posed concerns regarding risks associated or implied by the digital euro, especially to banks.
Should a major economy be able to implement a CBDC to a wide audience, its acceptance in international trade and payment systems would likely undermine the U.S. dollar’s status as the default currency for world trade, and thereby curb U.S. influence in world affairs.
According to U.S. Federal Reserve chair Jerome Powell, it is necessary for the Fed to find the right approach to a digital dollar first, rather than lead other central banks and financial authorities towards digitalisation. A digital dollar project is already underway, and it could be unveiled as soon as July this year, according to James Cunha, project lead at the collaboration between the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology’s Digital Currency Initiative.