Will CBDC bring renminbi internationalisation?

17 August 2019

The People’s Bank of China (PBoC) reiterated that it is 'almost'ready to launch a central bank digital currency (CBDC) confirming that central bank money is in for major upgrades. It is in line with earlier announcements by Facebook, JP Morgan, Walmart that digital currencies are on the rise. The intent to offer a digital renminbi will likely serve to recalibrate if not change fundamentally national and international payments relations. By equipping the renminbi with new functionalities and utilities, it is likely to be a key part of China's long-held ambition of renminbi internationalisation.

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 faster payment is similarly indication that central banks are under pressure to modernise payments more generally. While faster payment is merely about moving money faster, CBDC is about changing money itself.

Central bank money remains essential as medium of settlement. It exists in bank note and reserves formats. The first is to allow the non-bank public to make retail payments. The second consists of account balances of commercial banks at the central bank to conduct large value transactions. CBDC is central bank money in token format normally issued and run on a blockchain. It will likely be acquired similar to bank notes 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’. This could mean that it will use some distributed ledger technology (DLT) likely consisting of a permissioned network run by a select number of participants and 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 soon would underline 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. It forms integral part of a broader vision of the tokenisation of assets. Tokenisation is a new representation of assets, goods and rights that encapsulates all needed information to record and transfer ownership. Tokenisation 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.

CBDC enables diversification, resilience and choice in payments. At retail level, it would allow the non-bank 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 possible to conduct payment versus payment transactions by simply exchange of tokens and hold central bank money off shore possibly also as substitute for central bank foreign exchange reserve allocations.

CBDC is not about making payments faster. It is to change how currencies can be used. A DLT-enabled currency becomes an object that 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 restore some intrinsic value amid new functionality.

China is expected to use CBDC to advance its objective of making the renminbi become a prominent international currency. A tokenised renminbi would exhibit properties that could make it far easier to use it 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 international settlement or invoicing media. If central bank money liquidity can become 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.