CBDCs Like China’s DC/EP to Face Problem of Accumulated Balances

A major problem is bound to beset the wider use of China’s central bank digital currency (CBDC) as well as others being pursued by G20 economies, a financial expert has said. Yana Afanasieva CEO of Competitive Compliance notes that digital wallets being used to store value could end up distorting the market as a result of the potential problem of balances being accumulated and not used.

“I believe this issue of potentially lots of balances being accumulated in fiat form within the digital wallets is a concern that has been admitted and widely communicated by the members of the G20 and in the recent report that they have released around central bank digital currencies which they released in early October this year,” she said in her interview with CNBC’s Squawk Box Asia. “They said that even though they like and welcome the idea of governments being able to access a lot of people and give them money and physical transfers if needed as in, for example in the case of COVID, if let’s say a lot of people have digital currencies in digital balances in these wallets and something happens (like) there is a market shock (or) there is a panic, then there could be a run in the banks and there would be massive requests to withdraw these funds and this is something that is obviously a very unwelcome event which could create a lot of instability and that is the biggest concern for growing further digital wallets and central bank digital currencies as we see it now.”

With more digital banks opening up including in Hong Kong, the chances for digital currencies to be in more hands have been increasing with time with more than 200 million wallets expected to be active by 2030 according to a Deutsche Bank report which says China’s digital yuan could be used across major payment platforms WeChat Pay, Alipay, and UnionPay, as a “de facto global digital currency in emerging economies.”

Afanasieva did not object to a suggestion by Jack Ma that digital currencies like Bitcoin and China’s digital yuan could be used to establish a new revolutionary type of banking. Rather, she shared that the Chinese government and many other governments, like the idea of being able to access people’s wallets to give them money quickly and easily like with the coronavirus pandemic in which some governments wanted to deliver assistance and support to certain groups of people.

“But in order to do that, people have to have accounts within certain banks, they have to be vetted, they have to have accounts with good standing. (As a result) there was a time delay between governments being ready to provide the fund and the people being ready to receive it,” she said. “So this idea of people having instant access to governmental support is definitely something governments like and obviously it promotes the idea of financial inclusion and access to funding and potentially even technical and computer literacy in some countries and this is a very welcome development. However, because of the concerns we have just raised earlier around balances within these wallets being accumulated and potentially being misused not for payments but as a store of value could be a concern for many governments including China and they have been explicit about that.”