In July, the People’s Bank of China (PBOC) sent out word that it was preparing to launch a state-backed, central bank digital currency (CBDC). That plan now appears to be more serious than ever, with China reporting that it is only moments away from unveiling its new product. The initial tests of the digital currency have been successful, following some minor tweaks, and the introduction of the coin is imminent.
According to a Chinese government news outlet, Shanghai Securities News, the PBOC Deputy Director for payments and settlements, Mu Changchun, states, “The research on the People’s Bank of China’s digital currency DC/EP has been going on for five years. The People’s Bank digital currency can now be said to be ready.”
A prototype of the CBDC has been running in order to allow the central bank to work out the bugs. Some technical issues were addressed and officials and regulators are now satisfied that they have come up with a solution that is 100% blockchain-based and which fits all requirements to be used in retail environments.
The currency will reportedly work on a “two-tier” structure. The central bank will issue the currency to banks and other financial institutions, which will then convert them for public use. How that conversion would be managed was not defined.
This was intentional, as it allows for a more stable digital currency ecosystem. Shanghai Securities explains, “The economic development, resource endowment, population education, and acceptance of smart terminals are not the same. If a single-tier operating structure were adopted, it would that the People’s Bank must face all the public alone. In this case, it would bring great challenges. From the perspective of improving accessibility and increasing public willingness to use, a two-tier operational framework should be adopted to deal with this difficulty.”
The two-tier system also keeps the PBOC at the top of the ranks, with commercial banks one step down. This allows for easier introduction of digital currencies and is more “suitable” for Chinese conditions. It also doesn’t change “the existing money delivery system and the dual account structure, and will not compete with the commercial bank deposit currency. Since it does not affect the existing monetary policy transmission mechanism, it will not strengthen the procyclical effect under the pressure environment, so that it will not have a negative impact on the real economy.”
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