China Shows the Power of the CBDC with a Shenzhen e-CNY Lottery

Key Insights:

• Provinces in China are embracing the benefits of the e-CNY to reboot the Chinese economy.
• In China’s pilot phase of the central bank digital currency rollout, one province is holding an e-CNY lottery to boost spending.
• Beijing’s out-of-the-box move demonstrates the benefits of a digital currency, while other nations remain skeptical.

Central bank digital currencies (CBDC) and the e-CNY are hot topics in the wake of the collapse of stablecoin TerraUSD (UST). The brief unpegging of Tether (USDT) also caused market angst. The crypto market turmoil and rising risk to financial stability led some central bankers to press for progress on CBDCs.

While some governments remain skeptical over the need or the benefits of a CBDC, others embraced the concept and have demonstrated how a CBDC can benefit its citizens.

Government Holds a CBDC Lottery in Shenzhen to Boost Spending

The Chinese economy took a hit in recent months, with another wave of the COVID-19 pandemic leading to new lockdown measures.

While Beijing has delivered policy support, the Chinese government has also turned to the e-CNY to reboot the economy.

On Monday, the city of Shenzhen started an e-CNY lottery for consumers. As reported by Reuters,

“The southern city of Shenzhen started distributing 30 million Yuan ($4.50 million) worth of free digital cash on Monday to revive consumption and aid business.”

Consumers can use the e-CNY to purchase goods at stores and online.

According to the South China Morning Post (SCMP), e-CNY transactions totaled 87.6 billion yuan ($13.8bn) by December 2021, with 261 million individual wallets opened ahead of the Winter Olympics.

The SCMP reported that more than 8 million merchants accepted the digital yuan by December 2021.

The Shenzhen e-lottery follows the handout of 50 million in e-CNY hongbao (red envelope) in Hebei province.

While China makes progress with its CBDC pilot program, other governments and central banks are trailing.

US Lawmakers Continue to Question the Need for a US Dollar CBDC

Last Thursday, Fed Vice Chair Lael Brainard attended a virtual hearing on a US central bank digital currency.

The focal point of the hearing was the Fed CBDC report.

Giving testimony before the Committee on Financial Services, Brainard said,

“The rapid ongoing evolution of the digital financial system at the national and international levels should lead us to frame the question not as whether there is a need for a central-bank-issued digital dollar today, but rather whether there may be conditions in the future that may give rise to such a need.”

While Brainard delivered reasons to pursue a Dollar CBDC, lawmakers were divided.

Republican Party member Patrick McHenry talked of a number of considerations.

McHenry said,

“No one has made a compelling case on why we should expand the Fed’s mandate into retail banking or how a Fed-issued CBDC won’t politicize the Fed.”

McHenry added,

“There is potential for significant harm to our financial system if we move forward without sorting through potential consequences.”

McHenry questioned Brainard on what problem a CBDC would solve when considering payments are digital and the movement of cash between banks is digital.

Brainard highlighted three risks that included,

• Declining use of cash.
• Consumers no longer have access to a safe central bank-issued digital currency.
• Stablecoins become the dominant form of the US digital dollar, which could lead to Fragmentation of the payment system
• Instability of those digital currencies. The kind of instability that Congress tried to move away from 100 years ago.

The hearing highlighted that US lawmakers and the Fed are way off from a central bank digital currency. According to the CBDC Tracker, the US is in the research phase.

CBDCs in Circulation Today

A number of central banks and monetary authorities have developed and issued CBDCs today. According to CBDC Tracker, The Bahamas was the first with the Sand Dollar. Nigeria is the only other nation to launch a CBDC with the e-Naira.

Countries currently in their CBDC pilot phase, with China, include South Africa, Russia, South Korea, Canada, and the UAE.

The euro area, the UK, and the US are all in the research phase and will likely continue to trail other nations. Lawmakers are concerned with a number of issues, including privacy and cyber security.