A recent statement by Mu Changchun, the head of China’s Central Bank Digital Currency Research Institute claims that China’s digital currency will lead to strong competition among commercial banks. Institutions will compete to provide the best services using digital currencies.
Two-Tier Approach With Digital Yuan – Mu Changchun
China’s is the first of nations to roll out a digitized domestic currency and is being heavily scrutinized by regulators and finance moguls alike. Similar to Facebook’s controversial project Libra the Digital Currency Electronic Payment (DCEP) project will be powered partially by blockchain technology. Mu Changchun said that the People’s Bank of China will be adopting a two-tier approach with the project. The latter will be issuing the currency to the commercial banks. Subsequently, they will resend it to the general public. While the whole process takes its time and unfolds itself, the banks will continue to compete and offer the best of services.
“During the research period, and also the issuance period there will be a horse race approach,”
He further said,
“The front runner will take the whole market – who is more efficient, who can provide a better service to the public – they can survive in the future.”
He also commented that while the Central bank was “technology-neutral”, the technology of the latter will be subsequently adopted by other parties. As a matter of fact, DCEP has been designed to substitute existing coins and paper money. This implies that currency holders will not receive any interest payments. Thus, there will be no inflation or any ill-effects on the monetary policy.
Rising Popularity of Stablecoins and Digital Currencies
Notwithstanding, regulatory uncertainty due to the influence of cryptocurrencies, a large part of the money is moving to digital currencies. Mu’s comment indeed seems to carry substantial weight. Recently, a draft text prepared by the Finnish EU presidency, ECB and other EU central banks seek to create a digital currency that would have a legal base, unlike Bitcoin and Libra. As more and more nations come and join hands to support the making of digital currencies, it will invariably lead to a paradigm shift in the functioning of banks who might even plan on rolling out their own digital currencies.
The document reads:
The ECB and other EU central banks could usefully explore the opportunities as well as challenges of issuing central bank digital currencies including by considering concrete steps to this effect.
Analyzing the published draft, it seems that while the EU at present is only delving it on as a possibility, there are chances that the plan sees daylight soon.
Does ECB’s Want TO Gain Autonomy Over Monetary Flow?
An ECB official reported that the project would enable customers to use e-cash and deposit it directly at the central bank, thus, drastically reducing the need for intermediaries. Well, such a move is bound to receive flack from other banks, as ECB may take over its counterparts by managing digital payments at low costs.
The opposition which will ensue makes the whole idea about “Digital Euro” a bit too ambitious and far-fetched. However, it is also likely that ECB addresses the loopholes and ultimately rolls out the Digital Euro. Interestingly, former ECB President Mario Draghi said that there was no need for digital currency.
Stablecoins and Cryptos In China Must Abide by China’s Foreign Exchange Rules
Mu further gave his two cents on the concerns rounding Libra. He said that if a country has capital management policies in place, the cryptocurrency will invariably act as a threat to the country’s currency sovereignty.
When questioned about the state of stablecoins and digital currencies in China, he said that if they are to prevail in China they will need to abide by all of China’s foreign exchange rules.
Will the Digital Yuan and Euro see daylight soon? Let us know, what you think in the comments below!