The implications that the implementation of the digital yuan in China will have on the global economy
The idea of Central Bank digital currencies is turning into a possibility of what the future might look like. After the 2008 financial crisis, skepticism around the U.S. dollar’s credibility gave way to Bitcoin, since it is beyond the jurisdiction of any central bank and can therefore never be over-issued. A large portion of the investment in the U.S. dollar was due to the certainty in the currency, and after the inflation caused by the crisis, its reputation was tainted. Because of this, Bitcoin gained strength since it was not backed up by a central bank who could over issue it and cause its price to destabilize. But this characteristic is what generates disadvantages, since its value depends solely on the willingness of consumers to accept it as an asset or method of payment. This then opened the stage for stablecoins, which are digital currencies backed by sovereign currencies. The event that sparked the possibility of central banks launching their own digital currency in the western world was the announcement of Diem (formerly known as Libra), the Facebook-led digital currency. This announcement was a catalyst for monetary change, since it will change the FinTech sphere dramatically. Central banks and regulators started worrying about what a successful digital currency would bring to the table.
In fact, a study conducted by the Bank for International Settlements (BIS) evidenced that 80% of the surveyed central banks are either researching or developing their own Central Bank Digital Currency. The digital infrastructure of most countries is increasing exponentially as mobile cellular subscriptions and internet use are greater every day. According to the study made by the BIS, this may be a factor contributing to the demand to develop a CBDC. It is clear that CBDCs are being discussed,but some countries are already in the pilot testing phase, with the most developed one being China.
China’s central bank digital currency, known as “Digital Currency/Electronic Payment” (DC/EP) or e-CNY is already in its testing phase. China began exploring the possibility of launching their own central bank digital currency as early as 2014, with the creation of a digital currency research team following the demand boom for Bitcoin which led to a spike in its prices. Just 2 years later, the People’s Bank of China tasked its research group with preparing to ‘launch the CBDC soon’ (People’s Bank of China, 2016). Taking into consideration that most of the population in China (74% of consumers according to the 2020 mobile payment user questionnaire report) used mobile payments every day in 2020, it is reasonable for the Chinese government to enter into the digital currency market. And, as a matter of fact, the reality of using the digital yuan on a day-to-day basis is closer than ever. Companies such as WeChat and Alipay had already been transforming China into a ‘cashless’ society, and now the PBOC will join the market as well. Even though these two previously mentioned companies are not the equivalent of cryptocurrencies, while the digital yuan would be one, they have paved the way for the digital yuan by introducing the digital tools to make financial transactions without the use of banknotes and coins.
According to Forkast News, a digital media platform headquartered in Hong Kong, as of March 3, 2021, China widened the e-CNYs testing to Chengdu after already having completed trials in Beijing, Suzhou and Shenzhen. Prior to Chengdu, the DCEP project in China had already distributed 120 million digital yuan. The trials include transactions such as online shopping, online car-hailing and even phone-free hardware wallets, which as we know are daily activities in a digitalized society. The e-CNY would be a state-backed digital currency, which means it will use central bank currency for settlement. Furthermore, the digital yuan would not require internet or mobile connection to pay, which would make it more convenient. The next big step for the DC/EP is the 2022 Winter Olympics, in which the Chinese government seeks to further study the benefits of the digital yuan.
The DC/EP development is being led by the CCP, which has led many democratic countries to fear that it will offer no true anonymity. The implementation of the digital currency will lead the PBoC to have complete visibility and traceability of transactions, and it could allow China to shape the global standards for the emerging CBDCs. The underlying issue is the difference between private digital coins, such as cryptocurrencies, and central bank digital coins. A CBDC could possibly lead to the state having power over the finances of individuals. There are both advantages and disadvantages that the implementation of the digital yuan would bring to the table.
There are multiple scenarios in which the e-CNY could be implemented in. The e-CNY would be a substitute for cash in circulation in day-to-day transactions, but not for, say, bank deposits. The implementation of the e-CNY would make mundane payments faster, more efficient and more secure. But, at the same time, currency registration and traceability are built into DC/EP’s transaction process, which will have complete oversight over the use of the currency. At a national level the oversight of data by the national government is something already present. But if the DC/EP is taken as a model for future central bank digital currencies, democratic nations would suffer big challenges.
The traceability of transactions could help fight off and discourage crimes such as terrorism financing and tax evasion. This could be a useful feature for other CBDCs in countries such as Colombia and Mexico, where drug trafficking and money laundering are commonplace. But at the same time, this could also increase the control of authoritarian parties over their people if used incorrectly. Countries such as Venezuela, who are under an authoritarian regime, could therefore have access to the financial information of say the opposition leaders, and persecute them through the justification of suspected corruption or terrorism. These terms imply a conflicting problem: they are open to interpretation. Any government can therefore decide their own definition of terms such as terrorism, and use them to their advantage. These situations however are still at a national level. But the second scenario of implementing the e-CNY for which the Chinese party is advocating for has a larger scope.
Asia and the Middle East are already collaborating on digital currency projects for cross-border payments (transactions involving individuals, companies, banks or settlement institutions operating in at least two different countries). They are very costly, but the m-CBDC Bridge project carried out by the Central Banks of Hong Kong, China, Thailand and UAE aims to facilitate faster, more efficient and less costly cross-border fund transfers. The joining forces of these 4 central banks introduce a future with a real-time, 24-hour payment bridge between Asia and the Middle East. This process would contribute to the RMB’s international competitiveness. According to an article written by the Australian Strategic Policy Institute, the Chinese Government “has stated that one driver behind its attempts to internationalize the renminbi is to create a substantial rival to the US dollar”. This has caught the eye of many, since joining the m-CBDC could benefit China by facilitating the study of the benefits of commercial transactions using the digital currencies, and help build relationships with other regulators.
Because of the concerns regarding privacy policies that will characterize the e-CNY, it is likely that the western, democratized world will not be willing to accept it as a credible source of payment. But, in an effort to establish the credibility necessary to use this currency worldwide, it would be necessary to foster positive relationships with international central banks. This is why many believe the Chinese government joined the project. This would not only reinforce the credibility of the People’s Bank of China digital currency, but it could possibly lead the way for it to become the strongest currency and mark the beginning of a new e-CNY regulated market.
The e-CNY will not only alter the way we make payments every day, but it will restructure our whole economy. From a macroeconomic point of view, CBDC could even enrich the options for the implementation of monetary policies such as supporting small enterprises and the vulnerable by making them more efficient, and the uncertainty of transmission of the monetary policies caused by intermediate channels would be reduced. The DC/EP could exploit data security risks, given the fact that there are no express limits on the information-access powers. If the correct analysis and the required restrictions are not applied, China could over time obtain powerful new tools for social control and economic coercion. Shaping the standards of the emerging financial technologies should be something that the whole world needs to be informed on.