Former Governor Says China Must Prevent Abuse As It Develops CBDC

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Zhou Xiaochuan, a former governor of China’s central bank, has urged China to pay close attention to security and prevent abuse as it develops its CBDC. 

The People’s Bank of China has been testing its Central Bank Digital Currency (CBDC) or e-CNY and also rolled out a pilot app in January 2022. 

Prevent Abuse And Focus On Security 

Zhou made the comments during a forum held in Beijing, stating that security has always been a critical issue in finance, especially when it comes to currency. The former governor of China’s central bank, when talking about the security aspect, stated, 

“As technology costs continue to decrease and systems become more convenient, the cost of misuse also decreases.”

He also urged the country to prevent abuse, including preventing money laundering and arms trading. 

“When I mention preventing abuse, it includes efforts to combat money laundering and arms trading. Many arms trades in military conflicts, as well as drug trades involving substances like fentanyl, are often facilitated using cryptocurrencies and stablecoins for payments, making this an area that requires focused prevention.”

China’s central bank, the People’s Bank of China, has been testing its Central Bank Digital Currency (CBDC) or e-CNY. The bank rolled out a pilot app in January 2022. Since the creation of the digital yuan pilot projects in 2019, the People’s Bank of China has expanded the trial to 26 locations in 17 provincial-level cities and regions. This includes Beijing, Shanghai, Shenzhen, and Suzhou. 

Operate e-CNY In A Two-Tier System 

Zhou added that China must continue to develop the e-CNY in a two-tier system—currently, the e-CNY functions on a two-tier architecture. The People’s Bank of China is on the first layer for issuance. Meanwhile, commercial institutions such as commercial banks, internet platform companies, and telecommunications operators make up the second layer. 

According to Zhou, this design ensures the dynamic evolution of the digital currency, allowing the system to improve service levels and foster innovation through mutual competition, which could be particularly important for a large nation like China. Zhou also stressed that cross-border transactions are one of the most important directions of exploration when it comes to CBDCs. 

“It involves both technology and systems, as well as policy orientation.”

Hong Kong is actively testing the e-CNY for cross-border payments. According to a government official, it has already entered the second phase of technical testing and will incorporate a predominantly local payment system. 

CBDC Features Could Improve Monetary Policy 

Meanwhile, a Chinese foreign exchange official has stated the programmable features of a CBDC could help enhance the effectiveness of monetary policy tools. Currently, CBDCs are positioned as M0 currencies. The deputy administrator of the State Administration of Foreign Exchange (SAFE), Lu Lei, told a forum that central banks could make CBDCs M2 currencies. This means the currency could include some deposits and savings based on its programmable features. 

Programmable features in CBDCs are settings that the central bank can change. For example, money can be programmed to have an expiration date, or banks could add restrictions when it comes to specific uses. Lu added that he expected the People’s Bank of China to explore programmable features more and use the features to adjust rates of CBDCs, which could also be used to manage the economy better. 

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.