China has begun testing an official digital currency. If successful, it could change how the central bank manages liquidity and physical cash
have had a busy pandemic. Along with injecting vast amounts of money into the financial system, they have cleaned vast amounts of it—literally. From America to South Korea, central banks have quarantined and disinfected potentially contaminated banknotes. This hassle should make them all the more interested in a digital-currency pilot now under way in China. If successful, it could change how central banks manage both liquidity and physical cash.
Dozens of central banks have started looking at whether to issue digital currencies. But only a few have run trials and none has gone as far as China, which appears set to become the first country to put a central-bank digital currency into limited use. China’s four largest commercial banks began internal tests this month. The city of Suzhou will give some to government employees next month to cover transportation costs, according to state media.
China began exploring the concept in 2014 because of the technological upheaval in its financial system. A decade ago it was cash-dominated; last year mobile transactions reached 347trn yuan , accounting for four of every five payments. An official digital currency could help address a risk from this transition. Were mobile-payment systems to fail or a crisis to erupt, people might want cash. But there is less and less of it in circulation.
These powers are still some way off. Given the risks inherent to such a transformation, China will phase in thevery gradually. Citic Securities estimates that it will take several years for the digital yuan to replace just about 10% of all physical cash in China. For now central banks must continue to worry about money-laundering—both illegal and antiviral.
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