Digital money and technology: Central bank digital currency and the case of China

• • • Opening remarks at Peer-Learning Series on Digital Money/Technology: Central Bank Digital Currency and the Case of China

By Krishna Srinivasan

Digital money and technologies can significantly change the landscape for financial systems and bring important benefits to the public at large. Among other things, they could foster financial inclusion, create new value-added in the economy, and reduce transaction costs, including across borders. The digital money/technology series covers a broad range of topics, and so allow me to make a few general points.

As with any innovation, the challenge is to find the right balance between fostering innovation and maintaining stability and protection for consumers and investors. We will hear about CBDCs in greater detail 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 de-pegging of a large algorithmic stablecoin and exacerbated by the collapse of over‑leveraged financial institutions in digital asset banking and trading – highlights the risks created by regulatory shortcomings. As the size of digital assets grow, without proper regulation, the systemic risks that the sector poses will increase.

The stakes are particularly high for Asia and the Pacific, where many people see digital finance as an opportunity to build and exploit new drivers of growth and innovation. Several countries in the region are at the cutting edge of new developments stemming from the rise of private and public digital assets. New crypto assets and associated products and services proliferated in the region with transaction volumes of crypto assets 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 broader impact. We can and should learn from each other’s experiences. This peer-learning series thus highlights the experiences of countries in the region in regulatory guidance for the development of digital finance. Today’s event focuses on China’s experience with central bank digital currency, the e-CNY.

The IMF has set out an ambitious agenda for understanding the implications of fintech and digital assets for the global economy. For the Asia and Pacific Department, our goal 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’ll strive to provide timely advice and capacity development assistance to small states, low-income countries, and emerging markets and developing countries in coordination with the IMF’s Monetary and Capital Market Department.

As such, a lot of analytical work is underway on a broad set of issues. As it related to CBDCs, I want to highlight a survey of 36 Asian economies we conducted earlier this year to help us understand the steps countries have taken in their consideration of CBDCs and how crypto falls into this landscape. The note summarizing the survey will be released later this year, but for now let me share four key findings with you:

Finally, while there is a significant interest in CBDCs, very few countries are actually likely to issue them in the near to medium terms. Most countries in the region have shown interest, with work ranging from preliminary research and development to launching live pilots.

Third, the decision to adopt or explore CBDCs is closely linked with 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 uptick in crypto usage for remittances and investment among individuals has policymakers considering the tangible benefits of technological innovation, including lower cost and improvements in payment systems.

Second, several factors drive CBDC interest: The higher income countries seek to enhance the efficiency and safety of the payment system, while emerging market economies are looking to promote financial inclusion and financial stability. Some countries simply do not want to fall behind the curve, either because of regional peers or the private sector.

First, we find that the Asia and Pacific region is at the forefront of the CBDC exploration, and interest in CBDCs continues to rise. Even though no Asian country has formally launched a CBDC yet, China and India – the world’s most populous countries – are frontrunners for doing so in the near future. Other economies, including Hong Kong Special Administrative Region and Singapore are relatively advanced in their work on CBDC, while some countries including Japan, Korea, and Australia have done extensive research.

Let me also use this forum to highlight that in addition to our work on CBDCs, we have done several studies on private digital assets, including empirical analyses on the drivers of crypto-asset adoption across countries and the impact of policy actions.

Regarding the effect of policy on adoption, we find that crypto bans reduce crypto activities in the short term. However, because bans are difficult to enforce, the effect diminishes over the long term, even when regulations are strict. Also interesting, announcing a plan to issue a CBDC, likewise, dampens 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 with higher inflation and currency instability. The study points to regulated, local‑currency-backed stablecoins issued by the private sector as an alternative to retail CBDCs.

We find that the rate of crypto adoption is greater 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 controls are also positively associated with higher crypto adoption. These highlights the importance of implementing proper tracking of crypto activities and improving regulations.

Looking forward, we have several analytical projects at various stages of execution.

We’re also planning a series of more technical CBDC research to our 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 if and how to adopt a CBDC, and the implications for monetary policy and cross-border transmission of shocks.

For the Pacific Island countries, we are undertaking analytical work to examine the prospects for digital currencies (including CBDCs) and to set up a framework to help the countries assess the costs and benefits of digital currency adoption as well as potential policy implications.

Given the importance of these topics for our membership and the IMF, digitalization is now regularly discussed with the authorities during our annual Article IV dialogues and covered in corresponding IMF staff reports. In particular, the 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 with the potential to adopt CBDCs and/or encounter other digital finance issues soon.

I am very pleased that today we can bring together 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 the e-CNY could hold useful lessons for other countries as they search for ways to navigate the fast-changing digital finance landscape.

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