China has outlawed private cryptocurrencies, but the nation has still experimented with virtual money. In actuality, the most sophisticated market application of CBDC to date has been developed by PBOC, the central bank of China. Private-sector banks are required to distribute and manage these accounts for their clients under China’s CBDC e-CNY pilot program.
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PBOC started testing e-CNY in late 2019 for usage in consumer lifestyle applications including as retail, transit, government services, and wallet-based payments. After starting in four locations, the pilot program swiftly spread to five more. By May 2022, the e-CNY pilot had processed 260 million transactions totaling over 83 billion yuan through 4.5 million merchant wallets.
Early analysis of China’s CBDC use’s lessons revealed the following possible advantages:
promotes the inclusion of finance. It is not necessary to have a bank account in order to utilize e-CNY. Six approved, state-owned banks provide digital wallets that customers without an account may download and use.
supports KYC (know-your-customer) procedures. Like blockchain-based cryptocurrencies, CBDC lets users authenticate themselves to banks using personal digital fingerprints. By doing this, banks are able to avoid doing business with unreliable parties, which may prevent them from becoming involved in fraud and other illegal actions like money laundering.
lowers banks’ expenses of compliance. Banks may save money by using CBDC to reduce transaction reporting and monitoring costs.
streamlines government initiatives. It might be feasible for e-CNY to simplify the allocation of subsidies, such employee transportation.
How can different parties involved get ready for CBDCs in the future?
It’s still too early to tell what CBDCs’ future holds. Nevertheless, in spite of the uncertainties, central banks should think about the following five inquiries:
What is the ultimate goal for adoption when it comes to conventional currency? Realistic adoption targets and assessments of the present and future payment landscapes should serve as the foundation for business cases and scenarios.
Which groups is the CBDC trying to reach? The user segment—private individuals, commercial banks, or corporations—should inform design decisions. Expertise from sources other than the conventional central banks should be considered when making decisions.
How will the central bank function? Adoption objectives should be met by utilizing the central bank’s current connections with companies and commercial banks, regardless of the latter’s desire for substantial involvement.
What abilities and resources are needed? It’s possible that central banks will require new procedures for making decisions, fresh approaches to managing change, and personnel with partnership-building expertise.
What further adjustments outside of payments would central banks have to impose? To meet the adoption targets set by central banks, obstacles in the areas of regulation, commerce facilitation, and fiscal rights must be removed.
However, as we’ve seen, there are other entities involved in the game than central banks. Other stakeholders can get ready for the introduction of CBDCs in the following ways:
Infrastructure providers for financial services should optimize their design decisions to ensure compatibility with virtual currencies.
Retail banks, retailers, and payment service providers should take into account the potential infrastructure expenditure required to properly integrate CBDCs in addition to other modernizing payment needs.
In light of prospective legislative changes, chief risk officers and CFOs should keep an eye on how digital currencies affect bank liquidity and capital needs.
Speculative and well-known cryptocurrency investors should consider how CBDCs may impact their holdings. The development of central bank solutions may impede the expansion of cryptocurrency ecosystems.
Commercial banks should acquire the skills necessary to monitor digital currencies effectively for money laundering and KYC. Commercial banks would be required to shoulder the expense of KYC compliance in models where they issue CBDCs to consumers in exchange for deposit-based revenue prospects.
Although there are currently a lot of unanswered questions regarding CBDCs, more details about their advantages and downsides will become clear over time. There’s no denying that CBDCs have the power to drastically change the planet.