Central bank digital currency and the case of China

Digital Currency/Technology Peer Learning Series Keynote: Central Bank Digital Currency and the Case of China

July 7, 2022

Hello everyone and good evening if you are in the western hemisphere. Thank you for participating in today’s event on central bank digital currency and the case of China. As Alfred mentioned, this is the second event in our new series of digital money and technology events in the Asia-Pacific region.

Currency and digital technologies can dramatically change the landscape of financial systems and bring significant benefits to the general public. Among other things, they could promote financial inclusion, create new added value in the economy and reduce transaction costs, including cross-border ones. The digital money/technology series covers a wide range of topics, so allow me to make a few general points.

As with any innovation, the challenge is to strike the right balance between promoting innovation and maintaining stability and protecting consumers and investors. We will hear more about CBDCs today, but let me also highlight the critical point we find ourselves in for crypto assets. For example, the recent crypto market crash—triggered by the depeg of a major algorithmic stablecoin and exacerbated by the collapse of overleveraged financial institutions in digital asset banking and trading—highlights risks created by regulatory gaps. As the size of digital assets increases, without proper regulation, the systemic risks posed by the sector will increase.

The stakes are particularly high for Asia and the Pacific, where many see digital finance as an opportunity to build and harness new engines of growth and innovation. Several countries in the region are at the forefront of new developments stemming from the rise of private and public digital assets. New crypto assets and associated products and services have proliferated in the region with crypto asset trading volumes in many countries among the highest in the world.

Policymakers are keen to monitor the risks emanating from the digital finance sector, with many activities still unregulated but expected to have a wider impact. We can and must learn from each other’s experiences. This peer learning series thus sheds light on the experiences of countries in the region in providing regulatory guidance for the development of digital finance. Today’s event focuses on China’s experience with the central bank’s digital currency, e-CNY.

The IMF has set an ambitious agenda to understand the implications of fintech and digital assets for the global economy. For the Asia and Pacific Department, our focus will be to monitor and advise on these rapidly evolving areas for our member countries, and establish much closer interaction with member countries and key stakeholders. In particular, we will endeavor to provide timely advice and capacity development assistance to small states, low-income countries, emerging markets and developing countries, in coordination with the Department of Monetary and Capital Markets of the IMF.

As such, much analytical work is underway on a wide range of issues. Regarding CBDCs, I want to highlight a survey of 36 Asian economies that we conducted earlier this year to help us understand the steps countries have taken in their review of CBDCs and how crypto fits into this. countryside. The note summarizing the survey will be published later this year, but for now let me share with you four key findings:

  • Finally, although CBDCs are attracting great interest, very few countries are likely to issue them in the short or medium term. Most countries in the region have shown interest, with work ranging from preliminary research and development to launching actual pilots.
  • Third, the decision to adopt or explore CBDCs is closely linked to the rapid increase in the use of crypto assets in the economy, as well as attempts at regulation. For example, in Indonesia, the Philippines, and Vietnam, the rise in the use of cryptography for peer-to-peer remittances and investments has led policymakers to consider the tangible benefits of technological innovation, including reducing costs and improving payment systems.
  • Second, several factors are driving interest in CBDCs: high-income countries seek to improve payment system efficiency and security, while emerging market economies seek to promote financial inclusion and financial stability. Some countries simply do not want to fall behind, either because of regional peers or because of the private sector.
  • First, we see that the Asia-Pacific region is at the forefront of CBDC exploration, and interest in CBDCs continues to grow. Even though no Asian country has officially launched a CBDC yet, China and India, the most populous countries in the world, are the first to do so in the near future. Other economies, including the Hong Kong Special Administrative Region and Singapore, are relatively advanced in their work on CBDCs, while some countries, including Japan, Korea and Australia, have done extensive research.

Let me also use this forum to point out that in addition to our work on CBDCs, we have done several studies on private digital assets, including empirical analyzes on the drivers of adoption of crypto assets in countries and the impact of political actions.

  • Regarding the effect of policy on adoption, we find that crypto bans reduce crypto activity in the short term. However, since bans are difficult to enforce, the effect diminishes in the long run, even when regulations are strict. Also interestingly, the announcement of a plan to issue a CBDC is also dampening crypto activities.
  • Our research also shows that the crypto market can increase dollarization as US dollar stablecoins crowd out local currencies in crypto markets. This effect is stronger in countries where inflation and monetary instability are higher. The study indicates that regulated, locally-currency-backed stablecoins issued by the private sector are an alternative to retail CBDCs.
  • We find that the rate of crypto adoption is higher in countries with higher digital penetration and remittances, as well as weaker macroeconomic fundamentals, such as high inflation. Informality, corruption, and the degree of capital control are also positively associated with increased crypto adoption. These highlight the importance of implementing proper monitoring of crypto activities and improving regulations.

Looking ahead, we have several analytical projects in various stages of execution.

  • We are also planning a series of more technical research on CBDCs to support our capacity development efforts. This includes CBDC infrastructure and design options for emerging markets and developing economies. It also includes a framework for deciding whether and how to adopt a CBDC, and the implications for monetary policy and the cross-border transmission of shocks.
  • For Pacific Island countries, we are undertaking analytical work to examine the prospects for digital currencies (including CBDCs) and to put in place a framework to help countries assess the costs and benefits of adopting the currency digital as well as the potential policy implications.

Given the importance of these topics to our members and the IMF, digitalization is now regularly discussed with the authorities during our annual Article IV dialogues and covered in relevant IMF staff reports. In particular, Article IV consultations will focus on digital money issues for countries at the forefront of these issues (such as some Pacific Island countries and we will continue to closely cover developments in China) and countries likely to adopt CBDCs and/or soon encounter other digital finance issues.

I am very happy that we can bring together today colleagues and friends from the People’s Bank of China and the Hong Kong Monetary Authority, as well as international experts on these issues. China’s experience and pilots with e-CNY could provide useful lessons for other countries as they look for ways to navigate the rapidly changing digital finance landscape.

I am sure that this series of events in general and today’s event on the CBDC and the case of China in particular will be very useful to us all. Thanks.

Now allow me to hand over to moderator Yiping Huang.

IMF Communications Department


Call: +1 202 623-7100E-mail: [email protected]

@IMF Spokesperson