RBI has no time to consider a digital currency

New Delhi: While the rest of the world, including India, continues to grapple with the economic pandemonium unleashed by Covid-19, China last week released an application for mobile phones that marks the culmination of the more than six-year-long Digital Currency Economic Payment (DCEP) project of the People’s Bank of China (PBoC—India’s equivalent of the RBI), to bring out the digital version of the renminbi (RMB).

China has, thereby, become the first major economy to issue a digital version of its sovereign currency. Reserve Bank of India (RBI) officials in India, on the other hand, are in no mood to go for a digital version of the rupee.
The RMB digital test application, which is right now available for restricted downloading, was issued by the Agricultural Bank of China, which was one of the companies tasked by the PBoC last year to run the pilot programme. For the test, the PBoC had partnered with seven state-owned banks and telecom companies—the Industrial and Commercial Bank of China, Bank of China, China Construction Bank, Agricultural Bank of China, China Telecom, China Mobile and China Unicom.

One of the main aims of this project, as stated by Chinese officials, is to replace physical cash in the coming days. China already has a very high user base of digital payments, with Alipay and WeChat pay boasting of 900 million users and one billion users, respectively. As a result of this prevalence and familiarity with the digital payment system, China’s push for digital renminbi (RMB) is unlikely to meet any kind of resistance from its citizens and is, in fact, likely to get more users since it’s a government-backed product.

The application testing is right now being done in the four regions of Shenzhen, Xiongan, Chengdu and Suzhou. PBoC has already filed more than 80 patents regarding this project despite the setbacks it faced due to the Covid-19 pandemic. The pilot programme right now is focusing on a few select industries such as transportation, education, commerce, and medical care.

A large-scale testing of digital renminbi (RMB), pan-China, is expected to happen later in the year, following which it is likely to be rolled out on a larger scale, including as a preferred mode of transaction for bilateral international trade.

Under the DCEP model, commercial banks will first obtain the digital currency from the PBoC by depositing RMB reserve, just like they have been doing with cash transactions. Users and businesses will then register digital wallets with these commercial banks to use the new digital currency.

The ownership of digital RMB, through digital wallets, will easily be able to track to whom the funds are transferred, once the currency leaves the CBoC. This will allow the authorities to trace the trajectory of the issued currency with far-reaching implications.

DIGITAL RMB, A TOOL TO TACKLE US AND DOLLAR?
If China could provide an RMB-backed digital currency as a credible alternative to the USD, it would solidify its influence in the region by effectively becoming the de-facto reserve currency of many small nations who are heavily “helped” by China, and give them the “option” to move away from the dollar.

As digital RMB gets traction across the world and threatens the hegemony of the dollar, it is being speculated that it is likely to increase tensions between China and US, prompting Washington to push for keeping the US$ as the preferred currency in those countries and institutions that seek aid from the US.

However, well-known economist, Professor Zhiguo He, a Chinese financial economist serving as the Fuji Bank and Heller Professor of Finance at the University of Chicago Booth School of Business, said that digital RMB, at this point, was not enough to destroy the hold of the dollar in world trade.

“The implementation of DCEP facilitates the transaction/payment of CNY, but it is not enough to disrupt the USD’s advantageous position—at least at this point. The exorbitant privilege of the USD is due to the strength of the US economy, together with some ‘coordination’ features (i.e., I hold it because I know other people want it, so on and so forth). This is way more complicated than the introduction of DCEP,” Zhiguo He told The Sunday Guardian.
This new payment system, once it becomes a part of daily use, is likely to be preferred by small countries, powerful individuals, corporates because of the anonymity it is likely to guarantee.

In November last year, while addressing a conference in Singapore, Mu Changchun, the head of the PBoC’s digital currency research institute, stated that the PBoC will give anonymity to those who demand it.”We know the demand from the general public is to keep anonymity by using paper money and coins …we will give those people who demand it anonymity in their transactions. We are not seeking full control of the information of the general public,” he said while adding: “We will keep the balance between ‘controllable anonymity’ and anti-money laundering, CFT [counterterrorism financing], and also tax issues, online gambling, and any electronic criminal activities.”

DOMESTIC AND GEOPOLITICAL ADVANTAGES
The digital RMB, in all probability, will become the preferred mode of transaction from wherever the China’s ambitious Belt and Road project passes through. It is also likely to be pushed as a preferred tool by China to multiple African countries and European economies which have taken huge amounts of debt from China.
The DCEP will work on the NFC (near field communication) based system which does not require devices to be online during the transfer. This will be poised as a direct replacement of paper money, as DCEP will be usable in areas without internet coverage. In addition, DCEP doesn’t require the mobile device to be bound to a bank account—meaning the unbanked population will also have access to the digital currency.

Once DCEP becomes popular, people living along the Belt and Road can be connected, bypassing existing financial infrastructures completely, to DCEP. This will give China the power of total surveillance and control over the economic activity of potentially half the world’s population. DCEP will allow China to track everyone’s spending and transactions, and can seize or lock customer’s digital assets in their mobile wallets.

Initially, PBoC will be pushing for “discounts” to those corporate and institutions who adopt and pay through DCEP. This digital currency will be more traceable than cash, and can make the process of cross-border transactions easier. With a digitalized RMB, China would be able to track how such financial aid is spent locally.

The digital RMB is likely to play a key role in President Xi Jinping’s resolve to eradicate extreme poverty from the country by the end of this year. While China has been spending massively on social schemes, a large chunk of this aid by the central government is being siphoned off by corrupt local officials. With the introduction of digital RMB and the decrease of cash payments, the aids will come into the bank accounts of the beneficiary directly and every single yuan will be traceable.

According to Professor Zhiguo He, in the current stage, DCEP is designed to function as “cash” or just “money” but not “credit”. So its impact on the economy is minimal. Customers should not even feel the difference. Also, unlike Bitcoin, DCEP launched by PBoC is centralized, and does not represent any innovation in how the “money” works in the economy, he said.

However, he believes that despite being simple conceptually, DCEP and its implementation are quite challenging technologically. “I believe DCEP opens a new door for building the new generation of ‘financial infrastructure’ in China, which potentially shapes the payment and settlement system in the future. Other central banks who are interested in CBDC should take a look on the design and technology used in DCEP by PBoC.”

He added that there was no reason for anyone in the United States or in India to worry about the digital RMB. “People in China will use DCEP denominated in CNY in their daily lives. Again, as I said, DCEP is a technology. It is CNY or CNH (the on-shore and off-shore Chinese currency)—which bears the credit of Chinese government—that matters. If DCEP makes you feel CNY is easier to use, then just use it. If not, then just refuse to use it.”

RBI, HOWEVER, CONTINUES TO SLEEP
While China has already done a soft launch of digital RMB, policymakers back home believe that it is still “too early” to talk about a Central bank-issued digital currency. In December last year, RBI Governor, Shaktikanta Das made it clear that India was not concerned about digital currency and discussions on it were at a very “early stage” (In India, this “early stage” usually signifies “zero stage”).

“It is very early to speak on a Central bank issuing digital currencies. Some discussions are going on. Technology has not fully evolved yet. It is still in a very incipient stage of discussions and at RBI, we have examined it internally,” Das said while adding: “As and when the technology evolves with adequate safeguards, I think it is an area where the Reserve Bank of India will certainly look at seriously at an appropriate time,” he said. India roughly spends 1.7% of GDP or $210 billion is spent on printing, storing and distributing cash.

This cold response of the RBI Governor on a sovereign digital currency had come despite cashless payments taking off very swiftly in India in the last few years. The number of digital transactions (in crore) in India has seen a very high growth with Rs 181.6 crore in 2014-15, Rs 292.8 crore in 2015-16, Rs 595.7 crore in 2016-17 and Rs 921.7 crore in 2017-18.