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Central Banks of China, EU, US Moves On Crypto, Post-Pandemic

The past few years before the Covid-19 pandemic saw the rise of contactless payment systems getting popular in China and other countries. The announced figure showed that Alipay had 1.2 billion users and WeChat Pay had 900 million at the end of 2020. For Alipay, overseas users counted 300 million.

The rise of cryptocurrency such as Bitcoin, based on blockchain, in the second half of the 2010s, threatened the seigniorage power of governments around the world. Its private promoters dangle privacy to convince people to use the cryptocurrency in transactions and usurping the role of traditional fiat money issued by governments. At the cryptocurrency frenzy peak in April 2021, there were more than 6000 cryptocurrencies and stable coins in the market with a value of over $2 trillion.

The ascendancy of the handphone-based contactless payment system and cryptocurrency alerted central banks worldwide on the danger of the government losing control over monetary policy and seigniorage. At the end of 2020, a Bank of International Settlement (BIS) survey showed more than 60 central banks worldwide were actively studying the central bank digital currency (CBDC) issuance to reassert control on payment and money issuance.

Top central banks race

The pandemic highlights the importance of digital transformation to improve a country’s economic resiliency and accelerated the development of the CBDCs worldwide. The People’s Bank of China (PBoC) started a field test of its digital money, e-CNY, last October and has since successfully conducted nine rounds of the test. The PBoC is expected to launch the e-CNY in next February’s Winter Olympics officially.

The impending launch of e-CNY prompted the BIS to issue a joint report with the International Monetary Fund and the World Bank on July 9 on the implication of digital money to the global financial system. The report urged all developing countries to carefully study their CBDC project and look at the possibility that their home currency might face replacement threats from major countries’ CBDCs once the digital euro, digital dollar, and e-CNY become the dominant form of international payment. The efficiency of digital money in cutting down transaction costs, particularly in small denomination cross-border usage, will make it an attractive alternative to existing national currencies.

The European Central Bank (ECB) has launched the investigation phase of a digital euro project that will run for 24 months. The study focuses on four areas – digital ledger, privacy and anti-money laundering, limits on digital euro in circulation, end-user access while not connected to the internet, and facilitating inclusiveness with the appropriate device. The recommendation will be the basis of any digital euro design and launching, which the ECB thinks will take another two years. The ECB, however, said no technical obstacles were identified during the earlier nine-month preliminary experimentation study.

The endorsement of China and the ECB on the digital currency means all countries in the world will likely follow soon. There are only three economic blocs that have an annual GDP of over $10 trillion in 2020, and they are the United States ($20.8 trillion), China ($14.9 trillion), and the Eurozone ($12.7 trillion). The endorsement of any of the two virtually means the third one will follow or face its currency being displaced by the other two. Moreover, China and the European Union’s combined international trade is more than twice that of the US.|

The Chinese e-CNY enjoys the first-mover advantage, and its design will likely set the trend of other CBDCs. As a result, any CBDC will likely be:

(1) Retail-based and designed for use in daily transactions.

(2) Liability of the central bank, and it is the first time in the history of money that a series of computer codes will represent money and not something with physical form.

(3) Run on a two-tier system in the form of a master e-wallet of banks with the central bank forming the first tier and subsidiary e-wallet between the consumers and issuing banks forming the second tier.

(4) Most of the new banking innovation will be done via an application programming interface (API) in the second tier.

(5) The consumer experience will be like the current payment system and not noticeable from the consumer end.

(6) Financial innovation and inclusiveness will significantly improve with the efficiency of the new digital money.

Issuing CBDCs is a major endeavor for any country; building the supporting communication network and technical backbone is a daunting task. But the danger of losing a country’s currency franchise will force everyone to adapt. The appearance of new money carries social impact and moving to digital money will define the post-Covid-19 digital transformation; its arrival will mark the success of a society’s digital transformation.

Evolution of money

The search for the appropriate form of money has been the obsession of any human community since civilization started. The need for money to set prices, facilitate exchange and store wealth makes the question of what money is a central issue in any society and affects everyone’s life.

First, people used shells in the earlier Stone Age, then moved to copper and then precious metals of gold and silver in the agricultural society. Next, the more sophisticated social and government organizations in the 18th century industrial age brought fiat money such as banknotes to wide circulation in the 19th century. Finally, by the 20th century, the advent of the modern banking system and improved information communication technology brought money like payment intermediaries such as checks credit cards, and internet online payment systems such as PayPal into the picture.

The 20th-century innovation represents a proxy to money used in transactions, and the underlying money remained the legal tender authorized by a country’s law. The three functions of money, namely, medium of exchange, store of value, and unit of account, had never changed throughout the ages.

When one looks at the history of money, two outstanding features stand out: the first is that they are all in physical form in coins or banknotes, the second is that they are the product of technological evolution. Thus, the substitution of banknotes over coins happens because the new notes have counter-fake features, and it is more efficient in serving the three functions of money. The appearance of proxies to money such as checks and credit cards was based on the same logic. Now, a new form of money will undoubtedly supplement or replace the old form of money when new technology promises to make money transactions cheaper.


Dr. Henry Chan is an internationally recognized development economist based in Singapore. He is also a senior visiting research fellow at the Cambodia Institute for Cooperation and Peace and an adjunct research fellow at the Integrated Development Studies Institute (IDSI). His primary research interest includes global economic development, Asean-China relations, and the Fourth Industrial Revolution.

Also published in Manila Times on July 18, 2021. We welcome logical feedback and possibly working together with compatible frameworks (idsicenter@gmail.com).

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