China, Sweden, etc. Promoting the introduction of 'central bank digital currency that pays directly to individuals In order to strengthen central bank power and improve financial access, there is also an observation that the demand for bitcoin is decreasing.
200,000 people living in Beijing, China, recently received a text message to win 200 yuan (about 34,000 won). It was selected for the 'digital yuan' test jointly conducted by the People's Bank of China, the central bank of China, and the city of Beijing. They installed the digital comfort application (app) by clicking the text message link. Then, they opened the digital yuan information pattern (QR code) at convenience stores and restaurants to pay.
This is the landscape of China, which is trying to introduce 'Central Bank Digital Currency (CBDC) first among major countries. The People's Bank of China started researching digital currency in 2014 and established the Digital Currency Research Institute in 2017. Since 2020, tests have been completed in Shenzhen, Suzhou, Chengdu, and Shanghai. The People's Bank of China plans to commercialize the digital yuan in earnest in time for the Winter Olympics in February 2022.
Unlike mobile payment
The digital yuan is a digital currency issued by the People's Bank of China. The value of 1 digital yuan is equal to 1 yuan of paper currency. Yuan, which was circulated as banknotes or coins, has been moved to electronic form in smartphones. At first glance, it looks similar to simple payment, but it is not.
Simple payment is a service where you register a credit card number or bank account on your smartphone and pay with your smartphone. You can think of '○○Pay' such as Samsung Pay and Kakao Pay. There is a saying that even beggars in China beg with Alipay and WeChat Pay. In fact, 80% of payments in China in 2019 were made through mobile simple payments. Among them, 94% of users used Alipay or WeChat Pay. Why did the People's Bank of China issue CBDCs in a situation where simple payment is widely established?
In general, for money to circulate, it was necessary to go through a commercial bank. Money issued by the central bank flows to commercial banks, which distribute money to the private sector through loans, etc. Simple payment is a mobile payment process. Private companies such as Ant Financial (Alipay) and Samsung Electronics (Samsung Pay) only take charge of system development, but the money comes from commercial banks or credit card companies.
In contrast, CBDCs can be paid directly to individuals by the central bank. The central bank will fall out of the money circulation stage. If a CBDC is issued in Korea, all citizens will have a Bank of Korea account (app). In the CBDC era, there is a possibility that the role of commercial banks will be reduced.
Central banks can also track money flows through CBDCs. In the current system, it is difficult for the central bank to directly check the contents of an individual's easy payment usage. Even when tax evasion or money laundering is suspected, it is the authority of the auditing agency to examine individual transactions. However, if the digital yuan is commercialized, central banks will be able to know who bought what, where and how much money was sent to whom. Although there is an advantage of disappearing the underground economy through cash, there is a disadvantage that individual economic activities are exposed to.
control or embrace
Experts analyze that the digital yuan experiment was aimed at expanding the power of the central bank. Noh Eun-young, a professor at Sungkyunkwan University’s Graduate School of China, said, “The Chinese government can reduce its dependence on private companies in the payment market through digital yuan. .
Other countries are different from China. Most of the countries where CBDC research has progressed significantly are developing countries. Let alone simple payment, even the institutional financial base is insufficient. These countries have embarked on a CBDC experiment for people who find it difficult to visit banks.
The Bahamas, where the world's first CBDC was introduced, is a prime example. The Bahamas in Central America is made up of 700 islands. About 400,000 people are distributed in 30 islands. The institutional financial infrastructure is weak due to such geographical limitations. Instead, the mobile device usage rate of the public reaches 90%. When the central bank distributes digital currency through individual smartphones, Bahamian citizens will not have to board a boat to go to the bank.
According to the Bank for International Settlements (BIS) survey, developing countries gave high marks to 'financial inclusion among the reasons for issuing CBDCs. Financial inclusion means increasing financial access to people who have difficulty using the existing financial infrastructure. The idea is that the role of a bank can be replaced by a CBDC app on a smartphone.
Some developed countries are also positive for CBDC commercialization. Sweden was the first in Europe to start testing CBDCs. According to a report by the Bank of Korea, Sweden's central bank transferred most of its money distribution business to private banks in 2005, and the post office stopped its financial business in 2007. Even the private banks that took over the money distribution business decreased by one-third in 10 years from 2008. Swedes are increasingly finding it difficult to get cash. This is why the Swedish government started commercializing CBDCs.
If CBDC settles, will cryptocurrency disappear?
Cryptocurrencies like Bitcoin can also offer financial inclusion. In 2009, Bitcoin founder Satoshi Nakamoto challenged the premise that money is issued by a central bank or financial institution. He devised a system for individuals to issue (mine) money and transfer it between individuals. Anyone with a smartphone can store bitcoin and use it for payment.
CBDCs and cryptocurrencies both advocate financial inclusion but have different subjects. In the cryptocurrency ecosystem, private participants take over the role of banks by verifying (mining) bitcoin transactions. On the other hand, in a CBDC, the central bank plays its role.
Some countries are pursuing financial inclusion with Bitcoin. 70% of El Salvador's citizens in Central America do not have a bank account. In a society without bank accounts, economic activities are mainly carried out in cash. Bank remittance is limited to 30% of the public El Salvador recently adopted Bitcoin as a legal currency for the first time in the world, claiming that Bitcoin can boost the economy.
What CBDCs and cryptocurrencies have in common is that they are digital currencies that can be used only with a smartphone. However, many financial authorities observe that cryptocurrencies such as Bitcoin may disappear once CBDC is established. U.S. Treasury Secretary Janet Yellen said, “The ‘digital dollar’ could be a faster, safer, and cheaper payment method.
Lee Ju-yeol, governor of the Bank of Korea, also warned that “if CBDC comes out, demand for Bitcoin will decrease.” “Cryptocurrencies such as Bitcoin have no intrinsic value.” The People's Bank of China went a step further and banned the issuance and sale of cryptocurrencies or digital currencies by corporations and individuals through an amendment to the Banking Law. The US Federal Reserve plans to publish a report in the summer of 2021 focusing on the possibility of a CBDC issuance. The central bank of Japan also started the first test in April 2021 according to plans announced in 2020. The Bank of Korea will also promote a simulation in August 2021.
What will change when CBDC is commercialized? Some predict that the central bank will be able to implement monetary policy immediately. So far, even if the central bank adopts negative interest rates, the effect on fiat money has been minimal. In 2016, when Japanese people encountered negative interest rates, they took the detour by withdrawing money from a bank and storing it in a safe without increasing consumption.
But if cash disappears and there is only CBDC, central banks can directly apply negative interest rates to digital currencies. The central bank's monetary policy is directly linked to the real economy. By increasing the demand for loans, it can contribute to the economic recovery and control the appreciation of the currency, giving it an advantageous position in the trade. In addition, with CBDC, unlike credit cards and simple payments, you do not have to pay any fees.
Will, it is commercialized in Korea?
Financial experts do not predict that the commercialization of CBDCs in Korea will be easy. In China, a small number of simple payment companies monopolize the financial infrastructure, so the central bank can easily change it. In contrast, in Korea, commercial banks, credit card companies, and electronic payment and settlement companies (PGs) are complexly intertwined.
An industry expert said, “The Bank of Korea is not trying to spread CBDC, and to introduce CBDC, Korea’s payment process needs to be completely changed, and commercial banks and credit card companies will not let it go. Its use will be limited to the extent of supporting government policies,” he predicted.