In May 2020, China officially tested the electronic RMB when some government officials received salaries in this form of currency. Many Chinese enterprises and some foreign companies in China also agreed to accept payment for their products and services in the above currency. As the second largest economy in the world and the change in thinking about digital currency, China is ready to enter the 4.0 era as soon as it is possibly acceptable.
It was the ongoing US-China trade war, the current Covid-19 pandemic, and constant clash of ideas and growing disagreement between China and the Western world that forced the country to act faster so that the economy is less dependent on other countries, and avoid being labeled as a currency manipulator. Another dubious goal of China was to minimize the influence of the US dollar. Digital RMB, with an electronic serial number, will also help regulators fight money laundering crimes, tax evasion, black credit, and many other illegal monetary means. The CBDC will help prevent illegal money transfers, create stability and limit the devaluation of the RMB.
Digital RMB also helps in curbing power of financial institutions as personal payments are out of reach of players such as Alipay and Wechat Pay, and payments can be made immediately, with fast transactions at lower costs, anywhere in the world. China can use this currency as a non-traditional channel to regulate the market, such as by asking banks for detailed information about interest rates, purpose, and subjects for cryptocurrency credits, thereby better controlling and regulating policies. The issuance of CBDC will also help China with more options for monetary policies for use in their economic activities.
Movement by countries
The Central Banks of France, Japan, South Korea, Saudi Arabia, the UAE, Thailand, and even Cambodia are making similar moves. Last year, Bloomberg quoted US bankers JP Morgan Chase as warning that digital currencies could threaten US power and the breakthrough of digital currency will cost the US more than any other country. This led to moves made by the US Federal Bank as well as US lawmakers towards the electronic dollar.
However, the US, Europe, and some countries are working on issuing a national cryptocurrency. Central Banks are now compelled to seek effective weapons to face the world going into the 4.0 era, so the CBDC is the likely choice. It is being seen that the national cryptocurrency is one possible solution in the current context, when economies are suffering under the pandemic, trade wars, and currency wars, making paper money increasingly redundant.
Although there have been a number of private companies issuing Stablecoin, which closely resembles the CBDC, this is the first time that digital currency will be used. Large economies like China are testing sovereign cryptocurrencies, and now both the US and Europe have national plans for cryptocurrency, showing a major shift in mindset towards the 4.0 era, as well as for facing post-pandemic challenges. The Covid-19 pandemic is turning the global economy and financial markets into a new challenging era, when businesses, people, and economic sectors will have no choice but to change their approach towards how they work, live, and consume.
Future of CBDC
Since the cryptocurrency era began almost ten years ago there have been many ups and downs in the financial markets, the digital world, and the international economy. Although the earlier phase of cryptocurrency received a lot of support, the opposition to it was also vast. Now it receives more support although the future is still rather unclear. However, this era turned the page for many Central Banks in the context of traditional economic and financial markets, revealing many weaknesses, especially as the pandemic rages on. In the post-Covid era, when the pandemic has dealt its final blows to global economy and debts will have piled like mountains, an efficient form of monetary system is what will be needed.
Therefore, the sovereign cryptocurrency issued by the Central Banks is the most likely solution, although it is still quite early to see its efficiency. The CBDC still has a long way to go with many hurdles to overcome, such as lower transaction costs, meeting commercial value, and widespread use. This shows that the Central Bank of countries is making efforts to limit negative effects of the pandemic, trade wars, prevent a deeper economic recession, and bring growth again. Many other policies will also support the effort of the world to enter the 4.0 era as smoothly as possible.
Although the approach of each country is different, they all have the same view that CBDC will help to fulfil the shortcomings of fiat money, enhance convenience and improve payment efficiency, and ensure this currency is under the management of Central Banks. As CBDC is inherently a fully digital version of fiat money, but not anchored to fiat money, it can help prevent speculation, limit the explosion of cryptocurrencies like bitcoin, and bring about better control of money flow.
Phan Dung Khanh