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China’s digital renminbi could increase commercial bank competition

digital renminbi DCEP

China is reportedly starting to pilot it’s Central Bank Digital Currency (CBDC). Yesterday Beijing News published an interview with a former regulator where he suggested that China’s DC/EP (digital currency / electronic payment) could increase competition between commercial banks.

The DC/EP is designed as a multi tier system to reduce the risk of the People’s Bank of China crowding out commercial banks. It’s meant to be a replacement for cash, so commercial banks will use some of their money on deposit at the central bank to purchase digital currency. The banks will then distribute the currency to end users.

Because the digital currency is meant to mimic cash, it won’t initially offer interest, which will still make bank deposits attractive.

Chen Weigang, a former VP at the China Banking Regulatory Commission, explained why he believes there will be more competition. Usually when someone makes a card transaction to pay at a store, it’s a transfer from the buyer’s bank, to the store’s bank.

If a consumer uses the DC/EP to pay for goods, it’s a point to point transaction directly with the merchant. Hence, the merchant is not reliant on their bank for clearing the transaction. And now the retailer holds DC/EP which doesn’t earn interest. So it needs to deposit the digital cash in a bank account to earn money. However, it’s not tied down to any particular bank account. As a result it could shop around and move money between banks.

Weigang also pointed out that merchants will need to add new devices to receive e-wallet money because it’s a point-to-point system. It will work both as a software wallet and the digital currency can be stored on a SIM card.

The regulator also believes that the digital currency will be more secure because it will have biometric authentication – fingerprints, iris or face recognition – which bank cards lack. Plus if the cash is stolen, you can lock your wallet. And given every wallet has a number, it can be traced.

Although China appears to be the most advanced with CBDC, prior to Facebook’s Libra announcement, Sweden’s Riksbank was considered the most likely to move first. It recently appointed Accenture to run its CBDC pilots. Singapore, Canada, Japan, and Europe are also actively experimenting. And even the U.S. Federal Reserve said it was “assessing” a digital dollar.

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