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The Chinese RMB is going digital. Beijing has begun to experiment, in a limited trial in four cities, with the use of e-CNY. While the PBOC is the first central bank officially (soft) launching an e-currency, some 80 percent of the central banks around the world are studying the viability, practicality, and implications of issuing their own digital currencies.

(1) These e-currencies issued by central banks (called central bank digital currencies, or CBDCs) are distinguished from cryptocurrencies in the former’s lack of anonymity. In the case of the e-CNY, the PBOC will use blockchain technology to trace the owners and the uses of each e-CNY issued, i.e., the entire trail of transactions of each e-CNY – precisely the opposite of the goal of Bitcoin of decentralised anonymity.

(2) The PBOC has ambitious goals for the e-CNY outside China: that it will be a Chinese currency that other countries could use to bypass the dollar or the reliance on the US’ SWIFT payments system. However, the e-CNY faces the challenge of convertibility.

(3) Since the e-CNY will be issued as a substitute for cash, i.e., non-interest bearing, it is not expected to pose serious competition for interest paying bank deposits but could provide benefits (e.g., efficiency, coverage, and real time data) that notes and coins cannot offer. In contrast, since much of the developed world has zero interest rates on bank deposits, e-currencies would be a major competition to their banks.

(4) Successful development of the e-CNY could help enhance CNY’s international and reserve currency status, at the expense of the USD, the EUR, the JPY, and the GBP. But we do not believe this innovation would be sufficient to supplant the dollar’s hegemonic position in the world, since the Fed could and probably will also issue e-dollars one day.

Bottom line

China invented fiat money in the 7th century, and, in the 11th century, the government monopolised currency issuance. It is, thus, fitting that the PBOC is the first major central bank to introduce an e-currency. We believe others will follow, including the Fed and the ECB. The invention of fiat monies gave governments enormous power.

In many ways, the innovations in the issuance of sovereign fiat monies have lagged behind e-commerce, and central banks now run the risk of an erosion in seigniorage if they themselves are disintermediated. We see the CBDCs as a countermeasure to the rise of cryptocurrencies, with a key advantage being the former’s low volatility. CBDCs will likely win in the end as the dominant media of exchange, unit of account, and store of value.

The e-CNY has several advantages, but has two features that might be considered flaws:

(i) the lack of anonymity and

(ii) an outstanding question about convertibility outside China. The Fed, the ECB, and other central banks will likely also issue their own CBDCs in the coming years, presumably with their own distinguishing traits and technological features (such as anonymity and the ability to confiscate the e-currency in certain situations), which could have implications for how popular they are as international currencies and the transmission mechanism of monetary policies. In the coming years, it will be most interesting to track the various CBDCs as they are developed.

Bottom line

China invented fiat money in the 7th century, and, in the 11th century, the government monopolised currency issuance. It is, thus, fitting that the PBOC is the first major central bank to introduce an e-currency. We believe others will follow, including the Fed and the ECB. The invention of fiat monies gave governments enormous power.

In many ways, the innovations in the issuance of sovereign fiat monies have lagged behind e-commerce, and central banks now run the risk of an erosion in seigniorage if they themselves are disintermediated. We see the CBDCs as a countermeasure to the rise of cryptocurrencies, with a key advantage being the former’s low volatility. CBDCs will likely win in the end as the dominant media of exchange, unit of account, and store of value.

The e-CNY has several advantages, but has two features that might be considered flaws:

(i) the lack of anonymity and

(ii) an outstanding question about convertibility outside China. The Fed, the ECB, and other central banks will likely also issue their own CBDCs in the coming years, presumably with their own distinguishing traits and technological features (such as anonymity and the ability to confiscate the e-currency in certain situations), which could have implications for how popular they are as international currencies and the transmission mechanism of monetary policies. In the coming years, it will be most interesting to track the various CBDCs as they are developed.

Disclosure

None of the contents of this document should be understood as constituting research on investment matters, or as a recommendations, advice or suggestions, implicit or explicit, with respect to an investment strategy involving the financial instruments discussed, or the issuers of the financial instruments, nor as a solicitation or offer, nor as consulting on investment matters, of a legal, fiscal, or other nature. All the companies of the Intesa Sanpaolo Group, its administrators, representatives, or employees, decline any responsibility (fault-based or otherwise) deriving from indirect damages potentially caused by the use of this communication or its contents, or in any case deriving in relation to this document, nor may they be consequently held liable for any of the above. The information provided and the opinions contained in this document are based on sources considered reliable and in good faith. However no declaration or guarantee is offered by Eurizon SLJ Capital Limited, explicitly or implicitly, on the accuracy, exhaustiveness and correctness of the information, and there is no guarantee that results, or any other future events, will be compatible with the opinions, forecasts, or estimates contained herein.

Views accurate as at the time of publication. Opinions expressed by the authors are their own and do not necessarily reflect those of Eurizon SLJ Capital Limited, Eurizon Capital SGR or the Intesa Sanpaolo Group.
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