IASbhai Daily Editorial Hunt | 23rd May 2020
Most of the important things in the world have been accomplished by people who have kept on trying when there seemed to be no hope at all.– Dale Carnegie
EDITORIAL HUNT 83:“Notes on a digital currency plan, made in China“
SOURCES: THE HINDU EDITORIAL/EDITORIALS FOR UPSC CSE MAINS 2020
Partha Ray is Professor of Economics at the Indian Institute of Management Calcutta. Santanu Paul is Co-founder and CEO of TalentSprint, an edtech company
Notes on a digital currency plan, made in China
The expansion of the central bank’s pilot is the first such serious initiative in the world
SYLLABUS COVERED: GS 3:Economy
While China can be blamed for Pandemic, a silent digital revolution is taking place in China #Chinese central bank digital currency. Critically Comment -(GS 3)
This article is all about New digital revolution in China suppported by its Central Bank . You will learn about :
- Importance of digital Currency
- Pros and Cons of Cypto Currency.
- On April 29, 2020, the People’s Bank of China (PBoC), the country’s central bank came up with FinTech Development Plan (2019-2021), the People’s Bank of China has explored approaches to designing an inclusive, prudent and flexible trial-and-error mechanism.
- Dec 2019 a pilot program was launched to cover the cities of Shanghai, Chongqing, Shenzhen, Hangzhou, Suzhou, as well as Xiong’an New Area of Hebei, by guiding licensed financial institutions and tech companies to apply for an innovation test.”
- Digital Currency Electronic Payment (DCEP), available via a mobile wallet app, pegged 1:1 with fiat currency, and designed to replace M0 (comprising currency issued by the PBoC less the amount held by banking institutions), this is the first such serious initiative in the whole world.
FLAWS IN CRYPTO CURRENCIES:
- SCEPTICISM :Historically, monetary authorities everywhere have been sceptical of cryptocurrencies.
- FLUCTUATIONS : Wild fluctuations in the value of cryptocurrencies, the implied challenge to the monopoly of central banks in issuing fiat currencies,
- ASSURANCE : Central banks have been proceeding cautiously towards introducing central banks digital currencies, some have been planning to issue a fiat digital currency in the short to medium term.
- AUTHORITY : In particular, the survey revealed that nearly 25% of central banks have the required authority to issue a CBDC, while a third do not, and 40% remain unsure.
- INVESTMENT : Chinese investors, however, were always enamoured( have a liking or admiration for ) of cryptocurrencies.
- GOOD TIMES : Chinese stock market in 2015-16, bitcoins became increasingly popular as an alternative asset class in China.
- JOINT INITIATIVES : Chinese Cabinet approved the PBoC’s own digital currency development programme, conducted jointly with qualified commercial banks and institutions.
- ENDORSEMENT : The recent move to introduce the CBDC in China is a logical outcome of the efforts to curb and tackle its runaway cryptomarket practices.
- ULTIMATE PHILOSOPHY : Philosophy of the PBoC could simply have been, if you cannot beat them, join them.
ADVANTAGES AND A CONCERN:
- LESS PRINTING :First, paper money comes with high handling charges and eats up 1% to 2% of GDP.
- FINANCIAL COMPLIANCE : Second, by acting as a powerful antidote for tax evasion, money laundering and terror financing, CBDCs can materially boost tax revenues while also improving financial compliance and national security.
- PURCHASING POWER : Fourth, CBDCs can provide central banks an uncluttered view and powerful insights into purchasing patterns at the citizen scale.
- CROSS BORDER PAYMENTS : In the long run, it is believed that CBDCs will make cross-border payments fast and frictionless.
- PRIVACY : Concern about the relentless rise of a surveillance state and the concomitant erosion in citizen privacy and anonymity.
- MOVEMENT OF MONEY : If face-recognition technology enables states to spy on the physical movement of citizens, will CBDCs be used to spy on every movement of their money?
DESIGN OF DCEP :
- The central bank would involve financial intermediaries such as commercial banks.
- In tier 1 : the central bank would interface with financial intermediaries.
- In tier 2 : the financial intermediaries would interface with the general public.
- It is believed that the DCEP uses a DLT architecture (with central controls) which preserves the primacy of the monetary authority, unlike private cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) that are truly decentralised.
SIGNALS FROM THE MOVE
- CHALLENGING GLOBAL HEGEMONY : First, on the world economic stage, it may want DCEP to challenge the hegemony of the U.S. dollar as the default global reserve currency.
- ENCOUNTERING FACEBOOK : Second, in its war with American BigTech, it may want to showcase DCEP as its weapon of choice to counter FB or Facebook’s Libra, which is planning to offer a common cryptocurrency to 2 billion-plus FB users across the world.
- TAX NET FOR BUSINESS GIANTS :Third, and still in the realm of speculation, it may wish to use the DCEP to clip the wings of AliPay and WeChatPay.
- From gold to silver to paper to digital, the march of currencies goes on.
- China has rolled the dice on central bank digital currencies, challenging other nations to follow.
Welcome to the future of money.