Over 97% of the money in circulation today is from checking deposits – dollars deposited online and converted into a string of digital code by a commercial bank. The digitization of credit and debit card transactions and the development of banking apps has moved many traditionally cash-based transactions into digital space.
So far, the shift to digital has left the banking business relatively unscathed, at least in the West, where new players such as Paypal still rely on customers linking the service to their bank debit and credit cards. A few online-only banks have materialized, such as Chime and Nubank, but, again, these ride on existing rails. The Chinese financial sector has seen more disruption, as illustrated by the emergence of Alibaba’s Ant Financial and Tencent’s WeBank, which have leveraged looser data privacy protection and smart data analytics to dominate consumer payments and have also entered retail and small business banking. Broadly speaking, though, traditional banks have adjusted well to the digitization of money.
That could be about to change.
The impetus for more radical change is coming from China, whose central bank has been running an experiment with a form of cash called Central Bank Digital Currency (CBDC), which it envisions as the cash of the future, ultimately eliminating the need for paper money.
In a CBDC world, the digital code for each virtual currency unit will be held in a digital wallet and transferred seamlessly by the wallet-holder to other people’s digital wallets, very much as we see with today’s fintech and Big Tech digital wallets (think Venmo and ApplePay) and the wallets offered by the traditional banks (such as Zelle, a cooperative of six-banks including Chase, Bank of America, and Wells Fargo). In China, these services will be licensed to four state banks and three telecommunications companies, who will act as wallet distributors rather than cash depositories. Users will scan barcodes on their phones to make in-store payments or send money to other mobile wallets. The People’s Bank of China (PBOC) will periodically receive copies of customer transactions, stored on a mixed central and blockchain database.
The Chinese pilot began with the distribution of 100 million digital Yuan through lotteries in nine cities, including Shenzhen, Suzhou, Chengdu, Xiong’an, and the 2022 Winter Olympics Office Area in Beijing. By the end of September 2021, the digital currency pilot had recorded around 500 million transactions with 140 million users. E-Yuan will be fully rolled out during the Winter Olympics in February 2022, and if bilateral agreements with foreign monetary authorities are reached, tourists and business travelers in China will be able to obtain a Chinese e-wallet on their own phones.
Part of China’s motivation for introducing a CBDC is to reduce the country’s dependence on Alipay and WeChat, which currently account for 94% of online transactions, $16 trillion in value. It also helps reduce the threat from independent digital currencies such as Bitcoin, which could potentially threaten governments’ ability to manage their economies, not a prospect that a Chinese government would view with equanimity.
But China is not the only the only country interested in CBDCs: Sweden, Singapore, and South Korea are among 13 other countries testing pilots. The US is likely to follow suit; the Federal Reserve Bank of Boston, in collaboration with MIT, is currently designing a CBDC prototype. Possibly the US is worried about being left behind and the potential threat from China’s digital Yuan and its potential emergence as the global reserve currency supplanting the US dollar.
Read More at https://hbr.org/2021/10/what-if-central-banks-issued-digital-currency