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How Will the Digital Renminbi Change China?

China's new digital renminbi by itself will not help the currency to challenge the US dollar’s global dominance. Its true significance instead lies in its potential to shift the competitive balance of power between the country’s technology giants and traditional banks.

NEW YORK – While many central banks are still investigating the possibility of issuing a digital currency, China has rolled out a digital currency via a series of pilot programs since last year. The eRMB (my term as opposed to the more awkward official DC/EP) by itself will not help the renminbi to challenge the US dollar’s global dominance. Its true significance instead lies in its potential to alter the balance between China’s technology giants and traditional majority state-owned banks, thus indirectly enhancing the banks’ international competitiveness.

The pilot programs employ a two-tier structure with “controlled anonymity.” The People’s Bank of China (PBOC, the central bank) issues eRMB to an authorized group of large state-owned banks and other selected financial institutions, which then make the money available to households and firms – the digital currency’s ultimate users. Unlike with some other central-bank digital currencies under discussion, Chinese households and companies would not have an eRMB account directly at the central bank, thus distancing the PBOC from any glitches that might occur.

The authorized institutions see only a portion of the digital footprints of individuals or firms – for example, when they deposit or withdraw funds using eRMB – and are not supposed to keep the information longer than needed. That’s the “anonymity” part of “controlled anonymity.” The “controlled” part, however, is that the PBOC sees the entire history of the movement of a given eRMB unit, and can choose whether or not to use or share the information. Both the two-tier system and controlled anonymity are likely to be central features of any eventual national program.