Digital Renminbi: A Fiat Coin to Make M0 Great Again

The People's Bank of China has had an initiative for issuing a blockchain-based digital renminbi since 2014.

To understand the PBOC's motives, we must first distinguish between the digitalization of fiat currency and digital fiat currency.

The digitization of currency, which stems from the advent of electronic payment/clearance and mature interbank IT systems, allows commercial banks to more efficiently and independently generate the credit flows that expand broad.money supply, or M2. By contrast, digital fiat currency, enabled by blockchain technology, affects the base currency measure known as M0. Traditionally, central banks directly control base money creation/destruction but have only indirect power over the broader, credit flow-driven monetary supply.

Now, with digital fiat currency, they have the potential to bypass commercial banks and regain control of currency creation/supply end to end, thereby structurally centralizing their power in policymaking.

By contrast, a digital RMB would be integrated into M0, thus restoring control and influence to the PBOC. As the Vice President of PBOC Fan Yifei put it in a public interview: "With the help of technology innovation, we can gradually transit into issuance and circulation of digital RMB and impose effective supervision of in the private sector."

A digital RMB wallet client, published and maintained by the PBOC that's used by all entities and individual.

A registration center which records the registration of currency ownership and keeps the ledger of digital currency generation, circulation, and inventory management.

The issuance of a digital RMB will not only make cash and coinage obsolete, but also make commercial banks and M2 easier to control.

Eventually, the plan is to use incentives such as increasing the transaction cost of cash to push people towards using digital currency.

What's more, a programmable fiat digital currency could provide a seamless fiat-to-crypto on-ramp.