- E-commerce, not the settlement of financial flows, is the priority for China’s CBDC, according to panelists at Consensus
- Even though China will very likely beat the US to launch a CBDC, panelists weren’t convinced that’s what it takes to win.
Success for the People’s Bank of China’s central bank digital currency (CBDC), which is called the eCNY, does not mean dethroning the US dollar as the world’s reserve currency but rather providing more efficient payment corridors between Macau, Hong Kong and China, as well as strengthening cross-border e-commerce payments.
“It will improve some aspects of RMB internationalization, but it won’t be the driving force,” David Zou, Chief Economist of China-based research hub Wanxiang Blockchain, said during a panel at the Consensus virtual event. “The RMB internationalization is still constrained by the capital convertibility of the RMB.”
Zou believes that China’s eCNY won’t be a cross-border business-to-business settlement tool, but rather targeted towards e-commerce as well as give foreign visitors to China quick access to electronic payments. Currently, digital wallet apps like Alipay and WeChat Pay generally require a local residence permit. Zou said that the wholesale cross-border payments, at this time, will be limited to territories close to China — which generally means Hong Kong and Macau.
Michael Sung, a finance professor at Fudan University, added that the wholesale clearing and settlement capabilities of the eCNY are currently being tested by the Hong Kong Monetary Authority in a project called mCBDC.
Bilateral trade between Hong Kong, China, and Macau makes for busy payment corridors and separate financial regulatory environments mean inefficiencies and rent-seeking intermediaries. The mCBDC project looks to determine how these can be minimized, but also how CBDCs can be used with trading partners too, in this case the Bank of Thailand and the Central Bank of the United Arab Emirates.
“CBDCs allow central banks and entities to clear and settle digital currencies directly with each other without the traditional mechanisms that had existed in the past, like SWIFT or intermediary currencies like the US dollar” Sung said. “So that should be very profound in a potential disruption of the existing international monetary system.”
Weaponizing Access to Money
If China’s CBDC, with its close control by the state, becomes ingrained in the country’s e-commerce system there’s also the chance that it could be weaponized.
Yaya Fanusie, a Fellow at the Center for a New American Security, and former CIA counter terror financing analyst, said that China government’s implementation of CBDCs is about hoovering up data on the nation’s retail transactions and using that for control.
“This is really about data. The key thing here is that the central bank is, I think, inserting itself more into the payment architecture,” he said. “You’re creating architecture that gives the government a little bit more insight into transactions.”
“This is as much about data or maybe even more about data than it is about money,” he continued.
Data that is governed by Chinese privacy law, and is possibly a tool for economic retaliation.
Fanusie gives the example of how H&M was ‘cancelled’ by authorities in China after the company voiced its support for the Better Cotton Initiative, a collaboration among big brands to source more sustainable cotton — free of forced labor used in cotton farms from Xinjiang. What if every transaction that also involved an H&M product, even from peer-to-peer marketplaces like Taobao and Alibaba was also subsequently cancelled, he asked.
America Builds CBDCs the Best, But Don’t Expect One Soon
The institutional fear of China’s flexible laws might deter interest in international usage of a China CBDC, should it be marketed that way, Fanusie argued. A US CBDC would have natural appeal given the country’s rule of law and privacy rules around lawful access to data by authorities.
But don’t expect a US CBDC any time soon. Fed Chair Jerome Powell has repeatedly said that the US doesn’t need to be first with a CBDC and it’s more important to get right as the world awaits the Fed’s whitepaper on the topic due in July.
But are we sure that we all want a CBDC? Do we really need one just because China is building it?
A Bank of Canada research paper from earlier this year showed there are some gains from welfare distribution via CBDC, but consumer perception of the platform’s net benefit isn’t clear. After all, the IRS managed to distribute hundreds of billions of stimulus dollars with only a handful of complaints.
Fanusie quipped that the problem might not be the wait, but rather than the enthusiasm from central bankers. In meetings, he claimed, central bankers have said aloud ‘why are we doing this?’