China’s Central Bank Digital Currency and Its Impacts on Monetary Policy and Payment Competition: Game Changer or Regulatory Toolkit?

After carrying out some preparatory work for several years, China is likely to issue central bank digital currency (CBDC). Built upon the relevant experience and research in other countries, China has been carefully designing its own version of digital currency and issuance mechanism with a purpose of not disrupting financial intermediation. Nevertheless, it still leaves some residual issues unanswered, in particular, the narrow bank concern and application scenarios. While this article proposes to use interest rates as a policy solution to mitigate the narrow bank concern, the ultimate success of CBDC still depends on market competition. China’s CBDC, while initially being used as a regulatory toolkit to compete with other digital currencies, has potential to become a game changer once used in a large scale.