Central banks should develop ‘an alliance’ of digital currencies with common standards, according to Fan Yi Fei, deputy governor at the People’s Bank of China.
“In recent years with the development of distributed ledger technology and crypto assets, such as Bitcoin, stable coins have emerged and triggered a new wave of competition attempting to reap profit from substituting the fiat currency in circulation.
“To protect fiat currency from these crypto-assets and safeguard monetary sovereignty it is necessary for central banks to digitise bank notes through new technologies.”
Speaking during Sibos 2020, he also said that digital currencies would be an important step to address the ‘trilemma’ facing cross border payments.
“In cross-border payments we could achieve interoperability and address the trilemma (low costs, low risks and high efficiencies) by using digital fiat currency, collaborating with the private sector and adapting to long-term technology evolution continuously. [In addition], establishing a fiat digital currency alliance that observes regulations across jurisdictions and complies with international standards, like for example Principles for Financial Market Infrastructure (PFMI).
China has already begun testing its digital yuan, while the ECB continues to research the idea of introducing a digital euro.
Domestically, Chinese consumers have more quickly embraced digital payments. A 2019 report by RBC Capital Markets found that 37 percent of people in China use mobile payments compared to only 15 percent in the US.
“In the case of China’s payments service providers (PSPs) we have measure in place like account classification, settlement between PSP and banks being cleared through the NetsUnion Clearing Corporation (NUCC), a centralised payment infrastructure, as well as centralised depository of customers’ funds,” said Fan.
“China has formed a multi-layered payments service ecosystem that features the central bank as the core and commercial banks as the main body complemented by non-bank payments institutions. The proliferation of emerging payments methods such as mobile, barcode and NFC options are designed to fully meet the needs of consumers on payments services.”
While China has been making inroads in developing its domestic digital payments, Fan said much work is still needed in the cross-border payment space.
“Compared with domestic payments, the development of cross-border payments is still relatively unbalanced. For a long time, cross-border payments were unable to achieve “Low costs, high efficiency and low risk” all at once.
“At the same time, regulatory compliance for cross-border payments spans across various jurisdictions spanning from licensing to customer identification, account opening and foreign exchange checks and balances.”
Fan added that data has become more important than ever as the pandemic has forced more of the economy into digital space.
“Data is King. The digital economy has become more significant during the coronavirus pandemic. In cross border finance, big data analysis provides data support for decision making in trade financing and credit thus promoting the development of international trade,” he said.
“It also enhances macro-supervision, capital flow management, risk identification, forecast and prevention capabilities.”
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