Will Digital Currency Bring Internationalization Of The Renminbi?br>
The push by the People’s Bank of China (PBoC) to develop a central bank digital currency (CBDC) serves as a reminder that central bank money is due for a major upgrade. The intent to offer a digital renminbi has the potential to recalibrate, if not fundamentally change, national and international payments relations. Equipping the renminbi with new functionalities and utilities is likely to be a key part of China’s long-held ambition of renminbi internationalization.
What’s happening is that the architecture of money is changing. Technology is transforming what money can do and what consumers want money to do. Central banks are catching up. The recent decision by the Federal Reserve to adopt a faster payment service is another indication that central banks are under pressure to modernize payments more generally. While this new service is merely about moving money faster, CBDC is about changing money itself.
Central bank money remains essential as a medium of settlement. It currently exists in banknote and reserves formats. Banknotes allow the non-bank public to make retail payments. Reserves are commercial bank account balances at the central bank used to conduct large value transactions. CBDC is central bank money in token format, typically issued and run on a blockchain. It will likely be acquired similar to banknotes by exchanging reserves for CBDC. As such, the issuance of CBDC would merely be a substitution of central bank liabilities.
The PBoC indicated that its CBDC will not run on a ‘pure blockchain’ – so what could they be planning to do? This seems to point to a distributed ledger technology (DLT) consisting of a permissioned network run by a select number of participants where the PBoC retains full control over issuance. The PBoC also hinted that it will maintain the existing distribution channels for central bank money via commercial banks. If it were adopted now it would be a first.
A CBDC launch in the near future would reinforce that the PBoC is confident that DLT can meet needed technological requirements to support monetary transactions. While tests have shown that DLT e.g. can meet and exceed peak performance in U.S. equity trading, similar tests for retail payments remain rare. The deployment of DLT would affirm that the technology has come of age.
CBDC would be both catalyst and enabler of new token-based financial ecosystems. Tokenization is a modern representation of assets, goods, and rights that encapsulates all necessary information to record and transfer ownership. Tokenization also promises to simplify exchanges by enabling asset token for currency token swaps through instantaneous settlement or atomic swaps. It also aims to bring greater liquidity to assets, lower transaction costs, enhance transparency and broaden access to payments.
This form of digital currency enables diversification, resilience, and choice in payments. At the retail level, it would allow the public to conduct digital payments in central bank money on separate payment rails. In wholesale payments, it would offer alternative channels for central bank liquidity and enable peer-to-peer transactions. In international payments, it would make it possible to conduct payments by a simple exchange of tokens and hold central bank money offshore, and potentially also as a substitute for central bank foreign exchange reserve allocations.
CBDC is not about making payments faster. It changes how currencies can be used. A DLT-enabled currency becomes an object that when equipped with smart contracts can exhibit utility itself. Currency is thus evolving from having intrinsic value as commodity money to having no intrinsic value as paper currency to having additional utility amid new functionality that could reset preferences for holding central bank money.
China is expected to use CBDC to advance its objective of making the renminbi become a prominent international currency. A tokenized renminbi could exhibit properties making it easier to use in international transactions and attractive to hold compared with conventional currencies. New financial technology may help overcome constraints that would normally reduce currencies’ attractiveness as global settlement or invoicing media. If central bank money liquidity becomes more widely accessible, it may lead to a reordering of the importance of currencies and bring greater diversity in international payments. After monetary policy, fintech may be the new currency success factor.