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Retail CBDCs in China & Europe : The contrast between two regions
by Stéphane Mouy : Updated 2022 01 19
As in other regions, the digitisation of fiat money is a key issue in Europe with strategic implications, but it is currently at the stage of technical assessments rather than decision-making. The ECB launched a digital euro project in mid-2021 with a two-year investigation phase. For its part, Banque de France is implementing an experimental programme focusing on interbank exchanges and the use of DLT.
Whilst Europe keeps working on CBDCs but is unlikely to outline a concrete proposal before 2023, China has just taken a major step in retail CBDCs with the deployment since January of a mobile e-yuan application for the general public and available on the Android and iOS Chinese stores, but also in the WeChat Pay (Tencent) and Alipay (Ant Group) applications, which are key in mobile payments. This launch, which is still limited geographically, could be made official and generalised during the Winter Olympics, thus concretising important technical work initiated in 2014, on which the Chinese central bank (PBOC) communicates sparingly. The deployment of the e-yuan can certainly be seen as a reaction to the dominant position of the fintechs Tencent and Alibaba/Ant Group in payments, but it also illustrates the POBC's desire to bring cash into the digital era with a widely available solution offered as a direct alternative to cash and, like cash, directly issued by the PBOC, part of the M0 monetary aggregate and not interest-bearing.
The digitisation of fiat money has a triple objective for the PBOC: to guarantee access by individuals to the central bank's money with or without an internet connection - which implies supporting the offline mode; to promote financial inclusion - banking penetration rates are lower in China than in European countries; and to position the e-yuan as a vector of choice for the internationalisation of the Chinese currency. Seen from Europe, the latter aspect is important and even though there are still many challenges to establish the Renminbi as a top tier international currency, especially regarding the transparency of financial data, the massive deployment of an CBDC to individuals - including Chinese non-residents - appears to be a determining factor and illustrates the lead taken by the PBOC in this field.
In this context, the lack of details on a digital euro for retail use contrasts with the situation in China where a retail CBDC has been in production for several months and has now reached 260 million Chinese individuals (CBOC press release January 18 2022). This leads to three brief comments:
- The first is that the deployment of a retail CBDC is no doubt a very complex undertaking, but the stakes are high given the considerable impact of the digitalisation of banknotes on payment practices. The slow European response is likely to become structural as China is in fact taking a world lead in this area;
- The second is that offline use cases are central for retail CBDCs - an aspect recognised by the ECB in its October 2020 report - but not neutral when it comes to available technical solutions. To illustrate, blockchain and more generally DLTs are of limited practical relevance for offline use;
- The third is that retail CBDCs require the deployment of suitable digital wallets, which can be used to communicate reliable identity information meeting AML/CFT requirements. Europe is in the process of specifying digital identity wallets as part of the draft eIDAS 2.0 regulation, which is intended to meet the requirements of strong authentication for payments and to manage the offline mode. There is a link between the two aspects, but to date it has not been fully explored and has yet to be put into practice. A first - intermediate - step could be to specify an eIDAS 2.0 payment authorisation wallet that works both online and offline - with deferred settlement in the latter case. Let us hope this can be achieved without undue delay.