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China's Pursuit of Digital Yuan "Unswerving" in Wake of COVID-19 Global Pandemic, says Central Bank

China’s central bank has further galvanized its public commitment to creating the first central bank digital currency (CBDC), a digital version of the Yuan, at an annual meeting hosted last Friday by the People’s Bank of China (PBoC) vice-governor Yifei Fan.

A summary notice of the 2020 National Currency Gold Silver and Security Work Video and Telephone Conference released on April 4 outlined the People’s Bank of China priorities for the year ahead which reaffirmed its commitment to the digital Yuan which is also being called a Digital Currency Electronic Payment (DCEP).

According to the summary, the PBoC’s continuous improvements to cash systems and securities will be guided by Chinese Leader Xi Jinping’s new era socialism with Chinese characteristics. Per the release, “One is to strengthen the top-level design, unswervingly advance the research and development of legal digital currency, systematically promote the reform of cash issuance and return systems, and accelerate the promotion of banknote processing business, issuance of bank guards and issuance funds.”

This marks the third time that the DCEP has been raised at the annual meeting and the intensity of the language used seems to signal a strengthened commitment by the PBoC.

The DCEP Top-Level Design

So how will China create its digital currency? First of all, we know that the digital currency will not be running on a blockchain. After a review of the 50 patent applications submitted by the PBoC, it will be powered by a two-tier operating system and will not be fully decentralized.

According to Binance, the central bank DCEP will be backed 1:1 by Renminbi fiat, following a two-tiered structured system involving the central bank, commercial banks, and the retail market. The first layer consists of the PBoC issuing and redeeming China’s digital Yuan via commercial banks. The second layer is responsible for connecting the commercial banks with the retail market. The plan is to replace notes and coins in circulation, known as the M0 supply.

China’s central bank mentioned that their digital currency would be issued to seven institutions in the coming months, but that was last September.

Paul Schulte, who worked as the global head of financial strategy for China Construction Bank up until 2012 says that the largest and second-largest banks of the world, Industrial and Commercial Bank of China and Bank of China as well as the Agricultural Bank of China, along with Alibaba, Tencent and Union Pay will be receiving the digital currency first.

COVID Incentives

Although China’s digital Yuan project has been in development for years, given the effect of the coronavirus outbreak and its spreadability through surface contact, there may be added motivation to move beyond physical bank notes. The PBoC previously announced that it would disinfect cash for up to two weeks before absorbing it into their vaults and put around 600 billion of new yuan into circulation on Feb. 15

Researchers at the Bank for International Settlements (BIS) recently released its newest quarterly report on the changes in the payment industry, including the market impact of the recent coronavirus outbreak.

The report highlighted the ways the COVID-19 could be the catalyst to spark mainstream digital payments. Per the report, “The most transformative option for improving payments is a peer-to-peer arrangement that links payers and payees directly and minimizes the number of intermediaries. Many peer-to-peer arrangements use distributed ledger technology (DLT),”

Bitcoin and Libra have also caught the institution’s attention, while the BIS acknowledged that central banks are increasingly exploring the “desirability and feasibility of establishing their own peer-to-peer systems through digital currencies.”

The End of Physical Cash is an Inevitable Reality and Not to be Feared Says Union Bank President

The Chief Executive and President of UnionBank of the Philippines, Edwin Bautista, has predicted that the coronavirus pandemic will drive banks to fast track the shift toward digital currencies, therefore abandoning the use of physical money. Bautista said that the outbreak has caused rising demand for online banking services, thus pushing banks to rethink and revise their digital strategy. Bautista mentioned that the pandemic has provoked the need for all banks to go digital now. The executive predicted the beginning of the end of physical cash. Will hard cash disappear? Many technology cheerleaders like Edwin Bautista believe so. But how will that be possible?

Cashless Societies Are Already A Reality

A cashless society may sound like a huge transition, but in many places across the globe it is already a reality. Several jurisdictions across the world encourage their citizens to conduct all financial transactions electronically. Governments are seeking to limit the use of cash to enable the authorities to mroe effectively prevent tax evasion and control over the economy.

Advancing technologies, especially smartphones, have driven the rapid growth of the digital economy and enabled non-traditional financial solutions to explode. Across Europe, account-to-account payment services are increasing rapidly. Singapore, Australia, and Canada are among the countries, which are licensing non-banks to initiate mobile and digital payments. In Asia, China’s Alipay and WeChat, which mix high functionality and low-cost transaction features with lifestyle and shopping features are already leading the way. In the United States, credit card transactions are increasingly being used (62.97%). In sub-Saharan Africa, the mobile money operator model – where customers transfer mobile phone credit – becomes increasingly strong, led by Kenya’s mobile telephone banking service (M-pesa) that has since expanded to India, Albania, South Africa, Romania, and Afghanistan. Furthermore, governments of Latin American countries encourage citizens to use electronic payments to eliminate corruption.

The coronavirus outbreak has had critical consequences that have led to the disruption of business activities in several economic sectors. The crisis is forcing various institutions across the globe to rethink of cash – the germy surface, which most consumers touch each day. The concern over cash amid the virus may drive adoption of contactless and mobile payments options range from Google Pay, Samsung Pay, and Apple Pay, where consumers use smartwatches or smartphones to credit cards with a NFC chip and to pay in stores.

The virus is wreaking havoc to the world’s economy, with central banks in Lebanon, the US, Egypt, and many other nations have imposed cash limits. South Korea’s central bank mentioned that it was taking all banknotes out of circulation for two weeks and even burning some to minimize the spread of the coronavirus. It follows China’s massive initiative involving deep cleaning of potentially infected cash notes with ultraviolet light and high temperatures and even destroying some. Besides that, the Louvre museum in Paris banned cash due to the virus outbreak. The world’s largest museum decided to accept only credit card payments to make employees feel more comfortable about returning to work.

Various governments already encourage citizens to adopt the use of electronic payments so that to control the spread of the coronavirus. New payment systems using technologies such as credit cards and cryptocurrencies already allow consumers to make even small purchases using ubiquitous smartphones and other portable devices. These have already brought the dream of a cashless society within reach.

The Future of The Financial Sector Relies on Blockchain

The future of the financial industry relies on the whole shift from a physical to the digital world. Banks and companies across the world are increasingly adopting blockchain technology on a large scale for payment settlements. They no longer require heavy clearing and settlement systems for international instant payments. The use of blockchain among companies and banks enable settlement of international payments in real-time. Blockchain technology enables both big and small businesses to improve short-term liquidity. Moreover, central banks across the globe are increasingly adopting blockchain for faster international payments and therefore manage liquidity far more effectively.

Blockchain has become a significant tool that provides particular insights into how the coronavirus spreads. Financial institutions and companies are keen on deploying blockchain to enable mobile payments, electronic payments, and cryptocurrency transactions through digital wallets. With the rise of transactions happening by digital payments methods, the number of cash transactions is constantly declining. A cashless society is becoming inevitable. At some point in the future, governments would have to eliminate reliance on cash.

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Reserve Bank of Australia Meeting Finds No Strong Case for CBDC or e-AUD

The Payments System Board of the Reserve Bank of Australia (RBA) has found no strong public policy-case to issue a central bank digital currency (CBDC) despite the trend of declining cash-use throughout the COVID-19 pandemic.

A meeting of the Reserve Bank of Australia’s Payments System Boards was held today, to discuss the impact of the COVID-19 pandemic on the Australian payments ecosystem and the subject of issuing a CBDC, among other issues.

According to RBA release on Aug 21, Australian payments systems operators and retail payments have proven resilient throughout the COVID-19 pandemic disruption to the economy as have financial markets infrastructures. High on the RBA’s discussion was the declining uses of physical cash and the potential of a central bank digital currency.

Reserve Bank of Australia Deems CBDC Unnecessary

Digital payments services have come to the forefront for economies globally as the disruption of the highly infectious COVID-19 virus has led to decreasing use of physical cash.

Like the United States and China, as well as a host of other nations—Australia has floated the idea of a central bank digital currency or the e-AUD. However, discussions in the meeting of the RBA’s Payments System Board concluded that there was not a strong enough case for a retail central bank digital currency given the competitiveness of Australia’s current cashless systems.

Per the Reserve Bank of Australia’s announcement:

“Consistent with previous discussions, members considered that at present there is not a strong public-policy case for issuance in Australia, given that the electronic payments system in Australia compares very favorably with those in many other countries and access to cash remains good.”

The Payments System Board will continue to monitor the global payments ecosystem and continue research on the CBDC technology and policy.

The meeting reports said:

“The Board will continue to closely watch the experience of other jurisdictions. The Bank is continuing to research the technological and policy implications of a wholesale form of CBDC and is working to develop a proof-of-concept with external parties to explore aspects of wholesale CBDC, building on research the Bank did in its Innovation Lab last year.”

Lebanon Considers a Central Bank Digital Currency for 2021

The Governor of The Central Bank of Lebanon Riad Salameh has hinted that there was a possibility that the central bank, also dubbed Banque du Liban, may launch a digital currency by 2021.

According to a report by Bloomberg, the move to debut the national digital currency is geared to restore confidence in the country’s financial system, and gradually transition to cashless payments.

The current financial system of Lebanon has been described as a “nationally regulated Ponzi scheme” in which new monies are being borrowed to service old debts. For a country once viewed as “the Switzerland of the East”, one of its financial system anchors consists of its remittance industry, but it has been marred by the failing system.

With little details available with respect to Lebanon’s planned digital currency, Salameh also requested that banks operating in Lebanon should recapitalize by 20%.

Economically Troubled Nations Turn Towards Digital Currencies

It is becoming increasingly common for economically and financially troubled nations to take solace in digital currencies. While Lebanon is implying that it will introduce government-backed digital currencies, Venezuela, which has recorded a high inflation rate, has also seen its citizens turn towards Bitcoin as a hedge due to the weakening of the Venezuelan Bolivar.

While crypto activities are common in Venezuela, the government under the direction of President Nicholas Maduro has also created what seems like a Central Bank Digital Currency dubbed the Petro, a currency which the government wants the citizens to remit their taxes through.

While the economic woes of Venezuela have been ongoing for a while, Lebanon’s economic landscape took a new twist in 2019 according to reports. With Venezuela’s own financial system crumbling long ago, the nation has found ways to stay afloat, a move Lebanon appears to be taking baby steps towards at this time.