What will become of RMB once it goes digital?

China has made no secret of its interest in developing a state-backed blockchain-based digital currency. The initiative was launched by the People’s Bank of China (PBOC) in 2014 and the project has already generated over 78 digital currency patents since then. Even though there have been speculations, but no specific announcement on when the Renminbi (RMB) would go digital, it is safe to assume that it would happen soon.

China is not the only country to think of digitising fiat currency or introducing a Central Bank Digital Currency (CBDC). Sweden’s e-krona project and Canada’s CAD-COIN, among others, have also been widely discussed in this regard. Across the world, the future of money seems to be digital. In this article we explore various aspects of this future and its potential impact using digital RMB as an example.

Design and Structure

The bank of international settlements has provided an analysis with implementation considerations and impact of CBDC’s, in general. Based on information available so far, the CBDC issued by PBOC seems to have considered this analysis.

In the proposed digital currency system planned by PBOC, the currency would be issued and controlled completely by the central bank. The currency issued by PBOC would be backed 1:1 by fiat reserves. The central reserves database would be accessible to commercial banks and the currency would be issued and redeemed by PBOC through these banks. Commercial banks can, in turn, distribute the currency to individuals and businesses. Individuals and the general public can use the digital RMB via a digital RMB wallet client that would be published and maintained by PBOC.

The digital RMB would be built on the “one coin, two repositories, and three centres” approach where: “one coin” is the CBDC or the digital RMB; “two repositories” are the issuance database at the central bank and commercial banks’ reserve databases; and “three centres” include an authentication centre to manage the identity and authenticate financial institutions and end users, a registration centre to maintain each unit of digital RMB and its users corresponding to the functions of issuance, transfer and redemption, and an analysis centre which will provide analytical services based on available data to prevent money laundering and monitor real-time regulatory indicators.

The complete anonymity and decentralisation features that are core to cryptocurrencies would not be included (at least not initially), but the concept of the blockchain ledger and private-key encryption will be utilised to ensure tamper proof transactions. The transactions would be anonymous from the user perspective but not from the central bank perspective, allowing them to have complete control and oversight on financial data.

Impact

While it would be difficult to capture the overall impact of a CBDC in a single article, we will try to summarise the most likely outcome of this action.

The existing Chinese Yuan would become more versatile after the introduction of digital RMB and may be used both as a digital currency as well as a fiat currency. It would also amplify the existing circulation of the currency and boost its use internationally. China is already going cashless, thanks to the advancement in technology and e-payments. With payment processing systems supporting digital RMB and a government backed e-wallet, cash and coins may well become obsolete in the economy. Reduction in physical cash would also help reduce the cost of production and distribution, thereby boosting the seigniorage income for the government

At the state level, increase in the use of a blockchain-based currency and reduction in cash would facilitate improved control and regulation of money markets making it difficult for businesses and individuals to hide transactions, launder money or evade taxes. This would, in turn, allow for more accurate assessment of monetary policy based on indicators for currency supply, circulation speed and distribution.

At the individual level, a person’s spending history and assets balance could be available centrally. This would make it easier to judge their credit worthiness and help improve the speed of loan processing. Overall, whether they like it or not, the introduction of a digital RMB, could provide the central bank a window into the private lives of ordinary individuals. Digital RMB could also impact the public view on cryptocurrencies in general. Currently cryptocurrencies are associated with volatility and low public trust. Digital RMB would give people an option to use a state-backed digital currency. 

David Smith is a cryptographer with 12 years of experience in both the public and private sectors. His first startup, Karanzo, was a bootstrapped Amazon FBA business and he is currently working on his second startup that will track and interpret the use of contactless payments in the Greater China region.