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Why central bank-issued digital currency will be good
The Hong Kong Monetary Authority (HKMA) announced the commencement of the first phase of study on Central Bank Digital Currency (CBDC) to understand the pros and cons of such facility.
Now, what is CBDC? While mobile payment, such as Alipay or WeChat payment has been blooming for a long time in China, it is also getting popular in Hong Kong. So what is the difference between the two? And what is the difference between CBDC and the virtual currency and the currency used in various games in recent years?
Although CBDC and mobile payment are similar, their nature is very different.
CBDC is a cash register which uses network technology for recording payment transaction and circulation; while mobile payment is only a way of payment using mobile device with the transaction of debit / credit through bank account. Banknote still plays a major role in the monetary system.
CBDC is also very different from the virtual currency. The former is issued by the central bank while the latter, such as bitcoin, does not have a central issuer but with transaction verified by the entire network. And these virtual currencies are purchased and redeemed with real banknotes.
In recent years, the China's central bank, The People's Bank of China, has tightened transactions in these virtual currencies, and at the same time has sought to explore the blockchain technology behind the virtual currency. The testing on the use of the technology in the financial sector has begun in January this year.
At the end of last year, the Swedish Central Bank, Riksbank, also began discussing whether to introduce CBDC or e-krona, taking into factors such as technology, law, and practical issues. In Sweden, the value of cash in circulation has dropped to around 1.5 percent of GDP from almost 10 percent of that in 1950. Thus, many Swedish do not use banknotes and coins in their daily activities.
Britain, Canada and Singapore also undertook related study. CBDC has a lot of benefits for governments, such as helping to combat illegal activities like corruption. According to a study of Goldman Sachs, there was an obvious relation between the degree of cashless society and the decline in corruption. The greater transparency that electronic transactions promise to deliver can also lead to greater formalisation of the economy and higher tax revenues.
For businesses, it would result in lower cash handling costs and streamlined operational costs. Meanwhile, with increased customer transaction records, banks can have better understanding of their customers and their operations.
However, to implement CBDC, there is a privacy consideration apart from system security and other issues. Besides, the elderly may find it difficult to adapt. Last year, Sweden saw nearly 140,000 elderly jointly sign a petition to the government to safeguard the use of cash. Therefore, although many countries are actively studying CBDC, we believe that cash still exists in the foreseeable future.
As an international financial center, Hong Kong has to facilitate the healthy growth of new currency trading ecosystem. Support from the public is needed. I hope that the Smart City 3.0 initiative which is a bottom-up approach and driven by the public can explore how to make full use of the Internet resources and data to create a smarter financial system.
Dr. Winnie Tang
Honorary Professor, Department of Computer Science, The University of Hong Kong