Comment on “Developments and Implications of Central Bank Digital Currency: The Case of China e-CNY”

Xu (2022) contains a wide range of information regarding e-CNY, which facilitates our understanding of the project with concise explanation. It also covers most of the important issues on a central bank digital currency (CBDC) including the relationship between the public and private sectors, the roles of banks and nonbanks, the impacts of CBDC on the domestic and international financial systems, and anonymity and privacy issues.

Appreciating the overall structure of the paper, I have a few comments. First, one feature of e-CNY, which has implications for the financial and monetary system, is the limits on the amount of holdings and the value per transaction. These limits are designed to avoid an abrupt shift from commercial bank deposits to the CBDC. Xu's section 2 discusses the possibility of the unbundling of banking businesses into deposits, payments, and loans. In this context, the impacts of a CBDC could be different depending on its design choices, most importantly the holding/transaction limits, and the degree of public acceptance that result. Xu also discusses the impacts of e-CNY on money. As discussed rightly, a CBDC will affect M0, M1, and M2, and again, the impacts will depend on the design choices. Therefore, this point might be worth mentioning in Xu's paper.

Secondly and related to the first point, Xu speculates that the future banking business may be quite different from that in the past. This may be the case, but the issue is what will cause such changes. Xu points out various factors including the easier access to mutual funds by consumers, the greater use of nonbank payment services, and the wider use of data of fund-flows. These factors are, and will be, caused by digitalization itself, rather than by the introduction of a CBDC. It might be useful to elaborate the explanation in section 2 by distinguishing the impact of the general trend of digitalization in finance and that of the introduction of a CBDC.

Thirdly in relation to the legal tender status of e-CNY, Xu writes that “people cannot refuse to accept e-CNY as long as they have the facilities.” If merchants have the facilities, they will not refuse it. However, in many jurisdictions, the legal tender status is not enough to enforce them to use such form of a currency in a particular transaction. Merchants can always say they do not want to sell their goods to a customer with e-CNY or any payment instruments, based on the principle of freedom of contract. While I am a stranger to Chinese laws, I have heard that some merchants do refuse to sell their goods for paper CNY which has the status of being legal tender. While legal tender status will be an important advantage to private digital money, it is not perfect. In order to be accepted widely, a CBDC would need to have features that make people feel willing to use it, including being user-friendly.

In the current version of his paper, Xu explains the proposed design of the e-CNY more in detail, including the transaction limits. He also discusses the impacts of the introduction of a CBDC on banking business with those of the digitalization of financial services in mind and mentions the importance of the user-friendliness of a CBDC for its general acceptance.