China could potentially use its central bank digital currency (CBDC), the digital yuan, to influence and control interest rates. That’s a suggestion made during a speech by Lu Lei, the deputy director of China’s State Administration of Foreign Exchange (SAFE), a division of the People’s Bank of China.
Lu Lei observed the digital yuan (eCNY) was positioned as an “interest-free, high-energy currency” for the purposes of cash transactions (M0). According to news outlet Yicai, he went on to say, “I personally believe that, based on the programmability of digital currency, (if) smart contracts for interest rates are loaded on the central bank’s digital currency, the central bank’s digital currency will have the opportunity to become broad money (M2).”
Lu also discussed the potential for the eCNY in financial supervision to increase the effectiveness of China’s regulatory authorities. With “payment and accounts as the core” of oversight, it is possible for the central bank to achieve “full-process monitoring and penetrating supervision”.
This sounds Big Brother like. However, all governments have extensive supervision through anti-money laundering laws. Additionally, we previously reported that the former head of the digital yuan project observed that China can already track payments and doesn’t need a CBDC to do so.
On the flip side, the current digital yuan leader previously emphasized that private payments are possible for low value usage. Those scenarios involve just a mobile phone number. Authorities will only attempt to link to an identity if criminality is suspected.
Digital yuan risks
Lu also took the opportunity to discuss the risks of the digital yuan, and future challenges for the central bank. He referred to the potential problems of information trust, privacy protection, data gaps and financial exclusion.
He also described how programmability and distributed ledger technologies (DLT) could create problems in financial markets. Automated functionality can be layered onto a CBDC with smart contracts or AI. The resultant high frequency of transactions, could exacerbate investor panic in times of crisis. The central banks would need to meet this problem head on. Lu called for further research into high-frequency “intelligent” transactions.