Central Bank Digital Currency: Just Digital Money?

Digital money is a payment method which exists only in electronic form. In Malaysia, we already use some form of digital money or digital cash or digital currency. One very good example of this was during the beginning of the year, when Malaysia disbursed cash in digital form, via three e-wallet companies – Grab, Touch n’ Go, and Boost.

Malaysians could make payments via any of these 3 wallets which also served as a “store’’ for the digital money amount each eligible Malaysian above 18 years, is entitled to.

And then, there are digital currency programmes which central banks (CBDC) are actively piloting right now. China is reported by The Guardian, to be the first major economy to operate a digital currency, the e-RMB.

According to a poll by the Bank for International Settlements (the central bank for central banks), 80-percent of surveyed countries are in some stage of CBDC research or development.

What does all of this mean?

The thing to note is that China has online payment platforms provided by WeChat Pay and Alipay that are widely used and accepted. This is to the extent that in some cities, it is difficult to use cash because cash isn’t widely accepted.

So how is the CBDC different from digital money or payment methods offered by Alipay or WeChat Pay?

CCTV has reported an associate professor at Peking University, Xu Yuan, as saying that there is little change from the perspective of the user. “But from the perspective of central bank supervision, future forms of finance, payment, business and social governance, etc, this is the biggest thing ever.” calls it a sovereign digital currency, and indeed from a regulatory perspective, it has the potential to make all cash flow in society, transparent and traceable, if everyone starts to conduct payment transactions, online.

Currently, China’s CBDC is being trialled in several cities, with use cases including a transport subsidies scheme and salaries paid to government employees.

What else do we know about China’s digital currency?

A People’s Bank of China (PBOC) spokesperson has reportedly said that the currency will be backed by the nation’s credit. Comparisons were also made to bitcoin, with reports of the digital yuan being issued by China’s reserve bank “unlike decentralised cryptocurrencies,” and that the digital yuan will have “more price stability.” confirms that the virtual currency, called Digital Currency Electronic Payment (DCEP). is based on blockchain technology.

A national virtual currency is reported to have been first explored by PBOC, as early as 2014.

Efforts by other countries

Sweden is the only other country besides China, that is trialling a CBDC programme. Quite a number of countries are researching CBDCs or are in the midst of developing it. At a glance, the current global pandemic seems to have catalysed central banks to deliver an alternative to paper bills and coins that are at risk of contamination.

Digital currency is that alternative.

But there are other motivations behind a CBDC, which lists as the following:

  1. Promoting financial inclusion
  2. Increase seigniorage profit
  3. Implementing monetary policy
  4. Linking payments to identity

Speaking at a CoinDesk event, the Governor of the Bank of Mauritius said that they are issuing a retail-focused CBDC. Governor Harvesh Seegolam told CoinDesk, “At the level of the Bank of Mauritius, we’re currently working on a project and very shortly we’ll be making announcements … with respect to a potential introduction of a CBDC.”

At the same event, it was revealed Marshall Islands is tapping Algorand as the underlying blockchain infrastructure.

The Bank of England forwarded a “platform model” participated by the public and private sector, as a starting point for discussion and a basis for exploration. It has also been very clear that they would not compromise on design principles of their CBDC, if they do decide to go ahead and develop it.