The Future of Currency: Understanding China’s Central Bank Digital Currency
BY: Justin Pan
As the modern economy goes into the digital age, Central Bank Digital Currency (CBDC) appears to be an innovative instrument for modern financial institutions. It merges the concept of blockchain technology with the legal status of fiat currency, aiming to create a transparent and efficient transactional medium. CBDC provides a variety of benefits including greater legal protection, lower transactional cost, and promoting financial inclusion. Among the nations pioneering this transformation, China’s development and implementation of its own CBDC is arguably the most advanced and comprehensive. This blog post briefly explains China’s CBDC initiative, exploring its objectives and operational mechanism. My forthcoming article will further analyze the implications for private sectors, including privately run enterprises and individuals, resulting from this reformative financial initiative.
What is CBDC?
At its core, CBDC is a digital form of fiat currency, managed and issued by the national central bank. What distinguishes CBDC from cryptocurrencies is that it directly represents a liability of the national central bank. CBDC marks a significant improvement in the digital finance landscape, addressing gaps left by platforms like PayPal and Alipay. First, CBDC has the potential to enhance financial inclusion by offering access through digital wallets, bypassing the need for traditional bank accounts. Secondly, by cutting out intermediaries, CBDC lowers transaction costs, offering a more economical alternative for users and small businesses burdened by the fees of the existing financial system. Lastly, CBDC brings the promise of enhanced security, backed by central banks’ regulatory standards, offering a more secure and trusted digital payment environment.
Development of China’s CBDC
China’s journey toward digitizing its currency began in 2014, with the People’s Bank of China (PBOC) actively researching the feasibility and potential impacts of a digital yuan. This initiative gained momentum with the official launch of development trials in 2017, culminating in the implementation of pilot programs across various cities and scenarios, including the 2022 Beijing Winter Olympics. The CBDC’s design emphasizes a double-layer operational system, facilitating distribution through commercial banks and ensuring compatibility with existing financial infrastructures. As of June 2021, the Chinese CBDC has been applied in over 1.32 million scenarios, covering utility payments, catering services, transportation, shopping, and government services, with a transaction volume totaling 70.75 million and a transaction value approximating RMB 34.5 billion.
Forthcoming Article
My forthcoming article argues that China’s CBDC is a state-backed financial reform initiative, designed primarily to enhance the public good through improved financial capability. It accomplishes this by fostering a balance between private interests—including both individual and private sector concerns—and national interests. This balance is especially pertinent in the digital era, characterized by the predominance of small-scale online transactions. Such an initiative marks a substantial shift towards financial inclusiveness, a step that becomes especially important amidst the rapid digitalization of economic activities.
Sources
- People’s Bank of China, Zhongguo shuzi renminbi de yanfa jinzhan baipishu (中国数字人民币的研发进展 白皮书) [Progress of Research & Development of E-CNY in China] (2021).
- Jiaying Jiang & Karman Lucero, Background and Implications of China’s E-CNY, 33 U.Fla. J. L. & Pub. Pol’y 237 (2023).
- Jake Laband, NOTE: Existential Threat or Digital Yawn: Evaluating China’s Central Bank Digital Currency, 63 Harv. Int’l L.J. 515 (2022).