Investor concerns
There are some concerns about the way a digital currency may work in practice. In Sweden, for example, there was a backlash to the rapid move to cashless transactions from the elderly and disabled, who have struggled with the transition. In fact, the Swedish government even backtracked and forced banks to provide a minimal level of cash services.6
Financial disintermediation
But the main concerns go beyond the logistics of changing from one form of payment to another. A far bigger worry may be what critics call ‘disintermediation’ - the possibility that commercial banks could be cut out of their traditional role.
Currently, central banks already deal in digital currencies, but only at a wholesale level. Their customers are other banks instead of millions of individuals and businesses.
To some customers, a PBoC-based DC/EP may be seen as a lower risk alternative versus bank deposits. If these bank customers can get their digital currency directly from the central bank, they may be less inclined to deposit it in a commercial bank. Without those deposits, a commercial bank may have less money on hand to lend to other customers. It’s cost of funding may also increase if it has to compete for deposits with other banks or seek other funding sources. There are also concerns that during a banking crisis, the flexible nature of digital currency could result in sudden and massive digital bank runs.7
To address this concern, the European Central Bank has previously suggested limiting the cash-like portion of a possible digital currency to EUR3,000 per person. This is around the median European deposit balance.
China’s approach to managing this problem is to specifically include commercial banks in the distribution of digital currency. It is also likely to impose a size limit for conversion as well as keep the DC/EP non-interest bearing to reduce its attractiveness versus bank deposits. While people will be encouraged to hold DC/EP accounts, the amount in circulation is likely to be managed cautiously, and the impact to the traditional banking system is expected to be marginal, at least in the short term.
Competing payment systems
China already has one of the world’s most mature systems for digital payments. With DC/EP entering a fiercely competitive market, there are concerns how DC/EP would co-exist with the current strong established players.
The most recent figures from the PBoC showed that in 2019, banks handled a staggering USD49.27 trillion worth of mobile digital payments. Roughly four out of every five payments in China are made through Tencent's WeChat Pay or Alibaba's Alipay.8 In Europe, by comparison, around 76% of transactions are still carried out in cash, amounting to more than half the value of all payments.9 Fig. 2. shows that most digital platforms currently use Alipay or WeChat Pay as their payment partner while some have developed their own proprietary system.
The attractiveness of these payment systems lies beyond just payments but also in their ecosystems, where they offer a range of services from food ordering to grocery shopping and credit lines.
If the DC/EP offers inter-operability across different payment platforms, this could potentially provide Chinese consumers with greater convenience and drive adoption as the currency in the digital wallet on one payment platform (e.g. Alipay) is currently not accepted on a competing platform.