THE latest salvo in the New Cold War between China and the US is the soft launch of the ‘digital renminbi’, the new central bank digital currency (CBDC) by China. To celebrate the recent Chinese New Year, the People’s Bank of China distributed $31 per person to about 200,000 people via lottery, enabling people to download the amount directly on their smartphones. The State Bank of Pakistan is also considering a CBDC as indicated by its governor in a recent interview with CNN. Where China stands to gain much from launching a CBDC, it still too early to have a realistic cost-benefit analysis in the case of Pakistan.
Until only a few years ago, CBDCs were an exotic idea with Sweden’s Riksbank taking an early lead in developing a digital currency. However, a recent survey revealed that almost 60 per cent of central banks are examining CBDCs with 14pc already running CBDC trials. Under pressure by China’s stellar progress in CBDCs, US authorities have declared 2021 to be a “pivotal year” for CBDC, while steps are underway in the UK to explore launching ‘Britcoin’, or a British CBDC.
Given how new CBDCs are, they are often likened to cryptocurrencies like Bitcoin. Both types of currencies are created by running a computer code but the similarities stop here. Cryptocurrencies are decentralised and are not issued or backed by any single central bank. Cryptocurrencies are mainly used for speculation as is evidenced by the wild fluctuations in their value. CBDCs are issued and regulated by a state’s central bank and their legal tender status also has state guarantee. In other words, CBDCs can be thought of as parallel digital state currencies that only exist virtually in smartphones.
A majority of payments in China are already made digitally through Alipay or WeChat. Still, China stands to gain enormously from the digital renminbi. For starters, as China becomes a dominant player in the global economy, many would find the CBDC attractive for trade settlements thereby weakening the supremacy of the US dollar. Those residing in the US may resist carrying out transactions in digital renminbi, but early adapters in Pakistan, Africa and Latin America would prove to be a source of support.
How beneficial would launching a ‘PakCoin’ be?
The Chinese CBDC could also enable the government to totally phase out paper currency in order to allay fears associated with the spread of Covid-19. The Chinese central bank had already ordered the destruction of paper currency collected by hospitals in regions that were hit the hardest by Covid-19. Some argue that the digital renminbi could also prove to be a tool for social control in China as it could assist the authorities in maintaining surveillance over economic transactions since all CBDC-based transactions can be monitored.
It is not clear, however, how beneficial launching a ‘PakCoin’ or Pakistani CBDC would be. There are some advantages, no doubt. To arrest the spread of Covid-19, the State Bank can move to phase out paper currency, eventually. In the meantime, the State Bank would be well advised to start with replacing Covid-19 hospitals’ cash with new notes on a daily basis. Pakistani CBDC would also offer major advantages in surveillance against money laundering and terrorism financing.
Perhaps the most important benefit of PakCoin would be its use as an economic policy tool for providing targeted and time-bound stimulus to the economy. For instance, if the economy goes into recession, the government could instruct the State Bank to mine PakCoin with an expiration date of three months. This CBDC would then be sent directly to Ehsaasrecipients, who would use it immediately to bring about the much-needed economic stimulus.
There are many data, liability and privacy issues to be sorted before CBDCs can become a reality for a majority of the countries including Pakistan. For instance, central banks may not want to or have the capability to safely hold consumer data. People may not want to invest if they are unable to keep their investments anonymous, something that would no longer be possible with CBDCs. In the case of Pakistan, specifically, the small number of digital payments and the lack of smartphones will further mitigate the success of PakCoin. Then there is also the thorny issue of whether the State Bank has the authority to create such a CBDC in the first place.
These challenges notwithstanding, one thing is for certain that the digital renminbi will attain greater dominance with the passage of time. Pakistani policymakers should study the Chinese CBDC very carefully as there is much to learn. PakCoin may not materialise right away, but it may become a necessity in the next five years.
The writer completed his doctorate on a Fulbright scholarship. He teaches economics and public policy at Habib University, Karachi.
Published in Dawn, April 29th, 2021