Digital yuan may prove Hong Kong dollar cousin

The stronger the interest in China’s coming digital currency, the less we seem to know about it. Sifting through comments by officials thought to be the brains behind the project, Capital Economics’ chief Asia economist Mark Williams has raised an interesting question: What if the e-CNY, as some are beginning to call the new electronic cash, is not at all a central bank digital currency?
Most of us are by now familiar with electronic money, but popular apps like PayPal or Alipay are linked to bank accounts. A true central bank digital currency will bypass lenders and make us directly the customers of monetary authorities. We’ll use the liability of a central bank to pay for coffee or a book.
The excitement with the digital yuan — or the FedCoin or BritCoin — is precisely because of this: Tokenised money is supposed to be an IOU of a central bank, just like physical cash. We may use an ATM to draw down our accounts, but as soon as we do, the bank owes us less. The state owes us more.
Digital cash has been conceptualised the same way. When we transfer funds from a savings account into our digital wallets, the commercial bank goes out of the picture, and the central bank steps in. Tokens make credit risk disappear from settlements. Transactions can remain anonymous unless the monetary authority wants to lift the hood to check for money-laundering. However, if Williams is right, then e-CNY, which is believed to be heading for a soft launch coinciding with the 2022 Beijing Winter Olympics, may not be a claim on the People’s Bank of China. Then, “It isn’t strictly a CBDC at all,” he says. It may, in fact, be a digital relative of the Hong Kong dollar.
Since 1846, banknotes in the city have been the liability of commercial issuers. The three banks that supply everyday money maintain full reserves with the Hong Kong Monetary Authority. That’s why nobody sitting on a pile of Hong Kong dollars is anxious about the creditworthiness of HSBC Holdings, Standard Chartered or Bank of China (Hong Kong) Ltd.
Digital yuan may have a similar design, according to Williams’s reading of former PBOC Governor Zhou Xiaochuan’s statements. The e-CNY will be the liability of the bank or fintech sponsor of digital wallets.
They will issue tokens, each worth 1 yuan, and they will maintain reserve assets in their accounts with the central bank in the ratio of 1:1. Customers sleep easy, though there’s a cost for intermediaries. Suppose a saver has 100 yuan in a Chinese bank. The major institution that holds her money has to keep 12.5% in required reserves with the PBOC. The rest is free for the lender to seek the best possible return.

—Bloomberg