Next month will mark the fifth anniversary of the start of public pilots for China’s central bank digital currency (CBDC). This timing could mark very significant changes in the project. Earlier this week, Mu Changchun gave a slightly cryptic speech about the CBDC, known as the eCNY or digital RMB. Mr Mu is the leader of the Digital Currency Research Institute at the People’s Bank of China. Our interpretation of his remarks is that he implied that the central bank may embrace tokenization and that the digital currency may morph into involving fractional banking, although he did not explicitly say so. If that’s the case, it would become a tokenized deposit solution anchored by a wholesale CBDC.
In other words, rather than the current CBDC requirement of 100% backing at the central bank, perhaps commercial banks might only keep a proportion of issued tokens at the central bank, or just use it for interbank settlement. Mr Mu also highlighted the problematic lack of interest payments for eCNY holders, given their reluctance to hold idle currency. If a central bank directly offered interest to the public, that could crowd out commercial bank deposits. But if the eCNY simply becomes a format for fractional banking, then it makes sense to allow digital currency holders to earn interest.
As context, he discussed how the credibility of commercial bank money is underpinned by the central bank’s role as lender of last resort combined with deposit insurance. He said, “the central bank’s guarantee capabilities have effectively given commercial bank money the characteristics of central bank money, blurring the lines between the two and leading to their gradual convergence.”
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