The New World Payment System Order

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The central bank of China or People's Bank of China (PBoC) is back to innovating the payment system. When other countries were still struggling with the Covid-19 pandemic, China was actually here to bring a breakthrough.

Is the Digital Currency Electronic Payment (DCEP) or more familiarly called the digital renminbi (e-RMB) as the trigger. The momentum for the implementation of e-RMB is considered very appropriate in the midst of the adoption of the trend of non-cash payments which is increasing due to Covid-19.

China is rumored to have started a massive e-RMB trial. British media The Guardian reports that China has started trials in several cities, such as Shenzhen, Suzhou, Chengdu, Xiongan, and other areas that will host several Beijing 2022 Winter Olympics events.

One-quarter of money, local media said, the salaries of government employees in Suzhou will be paid in e-RMB starting May 2020. Four banks are on standby to streamline the digital salary payment process. The four banks include the Bank of China, the Agricultural Bank of China, the Industrial and Commercial Bank of China, and the China Construction Bank.

Historically, the emergence of the 2020 e-RMB should not come as a surprise. Initially, e-RMB was developed by PBoC in 2014 to counter the popularity of Bitcoin. Other goals, control the movement of digital money, prevent money laundering and tax evasion, and dominate the United States dollar. PBoC accelerated the launch of e-RMB after Facebook announced plans to launch the digital currency Libra last year.

As if not wanting to be left behind by China, South Korea has just released the latest developments in the development plan for the digital won currency. South Korea's central bank, the Bank of Korea, stated that the South Korean government had started a pilot project for developing a digital won from May 2020 to the end of December 2021.

With a duration of about 22 months, the South Korean government wants to identify in more depth all the technical and legal provisions required when the digital won is actually issued.

Starting from the phenomenon above, it becomes an interesting discourse topic, is the digital currency issued by the central bank or Central Bank Digital Currency (CBDC) only a momentary image? Quoting the results of research by the Bank for International Settlements (BIS) earlier this year, it could be that CBDC is a new order after the Covid-19 epidemic.

Based on BIS research, many central banks will issue digital currencies. About 20% of the 66 central banks surveyed by BIS said they are likely to issue digital currencies in the next six years, up from about 10% the previous year.

This acceleration is suspected to be an impact on Facebook's ambition to launch the Libra Coin.

The topic of the discussion of CBDC is actually inseparable from the origin of the existence of cryptocurrencies such as Bitcoin. Central bank's interest in CBDCs is caused by at least three fundamental issues, namely the efficiency of the cost of issuing money, implementing a faster payment system, and increasing financial inclusion.

CBDC form

At the theoretical level, CBDC has two forms.

  • CBDC as electronic money (e-money) as issued by PBoC. History records that China is not the first country to implement this form.

Previously, the central bank of Ecuador issued an electronic money CBDC called Dinero Electronico in 2014. Similar to e-RMB, Dinero Electronico only digitizes existing currency.

With this concept, the central bank will become an electronic money issuer that directly serves the public. This business model practically raises several issues, especially related to competition and conflicts of interest.

By becoming an electronic money issuer, the central bank will compete with electronic money issuers in the form of banks or other institutions.

This competition can become a disincentive for existing industry players and reduce the power to innovate.

  • CBDC is cryptography-based using blockchain technology and a distributed ledger. One of the central banks that developed this concept is the British central bank, the Bank of England (BoE).

In practice, the BoE does not fully adopt the distributed ledger technology used by Bitcoin.

The CBDC concept used by the BoE, the central bank remains a centralized entity that has the authority to create money. The fundamental difference is that in a centralized ledger system, there is a central bank that is responsible for verifying transactions, settlements, as well as recording transactions.

Through this mechanism, it is possible to expand direct public access to central bank accounts. The good news is that this business process allows transaction costs, such as switching, clearing, and settlement to be significantly reduced, even closer to zero.

Meanwhile, in terms of monetary policy, the central bank has more flexibility in controlling interest rates directly, including the money supply. However, the CBDC issuance process followed by the receipt of deposits at the central bank has the potential to create a conflict of interest for the central bank as the regulator and supervisor.

In addition, problems with the transfer of public deposits from commercial banks to the central bank must be anticipated so that there are no drastic changes that could threaten the stability of the financial system.

For example, in terms of funding, banks will undoubtedly lose some sources of retail funds, so they must develop other sources of funds, especially wholesale funding. As a result, the banking intermediary function in the financial system is disrupted and reduces the flow of bank income because the source of funds becomes more expensive.

Another crucial issue that must be considered is the legality aspect. The issuance of CBDC by the central bank as an expansion of the form of physical money to digital requires adjustments to the Currency Law.

Moreover, if the CBDC is issued to the entire public, another relevant legal issue is the expansion of access to accounts at the central bank by the public. So far, the central bank has only been a bank of commercial banks, so only commercial banks can open accounts at the central bank.

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