20 April 2021

FT: Is the central bank panic about the PBOC coin justified?

In further reactionary panic to China’s hugely-hyped digital currency advances, the Bank of England announced on Monday that it would be creating a joint taskforce with the UK Treasury to explore the potential of issuing a British equivalent.

As their press release stated: A CBDC would be a new form of digital money issued by the Bank of England and for use by households and businesses. It would exist alongside cash and bank deposits, rather than replacing them. The move is likely to magnify perceptions that the West can only meet the challenge emerging from China’s e-currency advances, and the greater efficiencies it is likely to offer users, by following a similar path.

And yet, this is hardly the case. The lack of critical commentary about the setbacks China faces in making its e-yuan system a proper challenger to the dollar are glaring. As too is the lack of proper critical commentary about the huge disadvantages that accompany any system that opts to go full CDBC (or unite with its domestic Treasury on any such action).

In the interests of dispelling some of these myths and balancing the narratives out there, we thought we would cite a few comments from Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics, who recently testified on this “threat” before the US-China Economic Security Review Commission.

Here’s the key extract (our emphasis): Hype has far outpaced the reality in digital currencies, CBDCs, and China’s digital RMB in particular. Cryptocurrencies like Bitcoin are booming, but these are mostly for speculation, as they are ill-suited to large volumes of payment transactions. We are still at an early stage in which the benefits of CBDCs have not yet been proven in practice, and the risks (cyber, operational, financial) are serious enough that most central banks will be hesitant to issue any until these can be resolved with a high degree of certainty.

China’s eCNY efforts have similarly yet to prove they will be any cheaper, more efficient, more private, or more convenient than the existing domestic and international payment systems. Therefore, it is unlikely to represent any more a threat to the dollar’s international dominance than the current forms of RMB, at least over the short and medium term. Nothing is certain over the long term, however, so the US should continue to carefully monitor China’s CBDC efforts and other digital currency innovations and incorporate any useful lessons to ensure that dollars and the payments systems that carry them remain competitive long term.

The important context is that for the large part, the Chinese state, allowed fintech companies like Alibaba-affiliated Ant Group and Tencent-owned WeChat to grow into overly dominant bank-like entities that serviced both financial and commercial activities. This is because it suited their interests to modernise the financial landscape and to drive mass adoption of digital cash systems. It made strategic sense to temporarily allow these entities to undercut the far more heavily regulated state-owned financial sector....

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