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Clearing A Safe Way for Digital Renminbi

Clearing A Safe Way for Digital Renminbi

July 29, 2021 | 

648 Views | 

JOHN K MWANIKI | 

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The crypto world is evolving, and the adoption of digital currency is making great strides. China's initiative to roll out digital renminbi is a remarkable event.  

Already, China has handed about $6 million digital renminbi to residents in Beijing for trials. This makes it the first digital currency to be used by a major economy. Note that it is a legal tender that also shares the same value with other Chinese Yuan Renminbi. 

What was the purpose of the introduction of the digital currency?

The People's Bank of China developed the currency with the purpose of replacing some of the cash that is in circulation. Also worth noting is that China has an advanced cashless payment system. The introduction of the digital currency would be an effective way to speed up these transactions.

The legal tender system will attract no interest, and it will play a vital role in reinforcing the already growing cashless system. 

There is also a need and desire to go digital as the use of coins and notes has proved to be expensive. That is both in terms of production and storage. The digital currency will come in handy in addressing some of the challenges that come with cash.

For instance, their usability which is a bit challenging. Coins and notes are also easy to counterfeit and easily used for illegal purposes.

Digital renminbi would also be at the center of eliminating systemic risk and enhancing competition in the payment arena. 

The digital system and platform will not only create a level playing field but also enhance the efficiency of the payment system. This way, the transmission of the monetary policy would be made effective.

How will the digital currency work?

The distribution of digital renminbi is set to be 2-tier. That is, the People's Bank of China will distribute it to the commercial banks in the country. From this point, the commercial banks will be handed the responsibility of getting the currency to the consumers. 

These banks should then be able to provide cash-digital currency exchange services.

Impact of the adoption of digital renminbi

As expected, the adoption of the digital currency will have an impact on financial operations. The one obvious outcome is that banks might become less stable than they are now. 

Note that the smaller banks have had challenges with managing their balance sheets and are usually facing the risk of failing. The rolling out of the digital renminbi could lead to people taking their money out of these banks.

These runs will particularly be sped up by the removal of sanctions regarding cash withdrawal. Is this something that can be mitigated? Certainly, but only to an extent, and this is through having caps in place on the maximum daily cash withdrawals. 

The fact that consumers will be able to move around their financial assets easily will be the cause of instability.

The internationalization of the digital CNY is also a possible outcome. China's financial importance and global trade is growing. This means the number of transactions settled with CNY will also increase.

There is also a possibility that the existing US sanctions will work to promote the adoption of the digital renminbi as an alternative to the dollar. 

There is also the possibility that the US dollar will lose its reserve currency status. Note that the US dollar role as a reserve currency is already under threat owing to the Covid-19 pandemic. The digital CNY could pose another challenge and replace the greenback since it is easier to adopt. 

How is the adoption of the digital currency being encouraged?

There has been a need for China to encourage the residents to use the currency, and there are several measures in place to accelerate adoption. The main challenge experienced amid these efforts is that people have fears of a possible invasion of privacy. 

1. Financial incentives

Several financial incentives have been put in place to address some of these worries. Already there are promotional discounts for the digital renminbi. These are set to be rolled out on a large scale just to encourage the currency's adoption.

The other incentive will be offering merchants using the payment platform lower fees compared to what competitors have, for instance, Alibaba. While this is the case, the incentives might also lead to losses. 

2. State employees will be paid in digital renminbi

To encourage other entities in the state to use the currency, the government will start paying the state employees in digital renminbi. This effort is already in its implementation stage, as pilots are reportedly being paid in the currency. 

This initiative should help in encouraging the widespread integration of digital renminbi for payroll across different entities in the state.

3. The launch of anti-monopoly regulatory efforts

Different government agencies are putting measures in place to mitigate monopoly and platform economy. This is meant to curb the power of established platforms like Tencent. This initiative is expected to accelerate the adoption of the digital currency, as consumers will have many options when it comes to payment methods. 

4. Support by large companies

The digital currency is already having a good reception in the state. Conglomerates and tech companies are playing a huge role in rolling out the currency. The conglomerates are now allowed to enable the purchase of the currency, and their large market sure will go a long way in pushing this. 

Chinese tech companies are also collaborating with banks to facilitate the use of the currency by consumers.

Conclusion

The rolling out of the digital renminbi comes with several benefits. One is controlled anonymity which will also curb terrorist financing and money laundering. The currency will also support international transactions in US-sanctioned and developing countries. 

The currency is also expected to bring about efficiency in transactions as banks will be working directly with the consumers. It is also set to bring about flexibility in the distribution of cash as it replaces the inefficient check system. 

Several initiatives are underway to facilitate the adoption of the digital CNY as retail giants are using it for payroll distribution and settlements.

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