Currency digitalization: The supply, demand, and infrastructure aspects of china's central bank digital currency

Abstract

This paper studies how digitalization affects the adoption of China's central bank digital currency (e-CNY). Utilizing provincial-level panel data from 2011 to 2021, we examine the impacts of "Breadth of Digitalization Coverage" and "Digitalization Level" on the supply and demand dynamics of e-CNY. Our findings show that digitalization reduces both the supply and demand of physical currency. This decreasing reliance on physical currency implies that digitalization has paved the way for adopting e-CNY. We further investigate the infrastructural factors that support digitalization progression and e-CNY's implementation. Our results suggest that the transition from physical to digital currency is jointly driven by wallet digitalization (enabled by smartphones) and payment scenario digitalization (supported by e-commerce). Our result findings provide implications to both China and other countries developing CBDC initiatives.