Countdown to the World’s First Major Digital Currency
A look at the internalization impacts of a China CBDC
China continues to accelerate its digital currency initiative with four completed pilots in Shenzhen, Suzhou, Xiongan and Chengdu. In the recently released white paper, Progress and Research & Development of E-CNY in China, the central bank reveals it has created over 20 million digital yuan wallets, and $5.4 billion (35.5 billion yuan) has been settled on the e-CNY network.
The People’s Bank of China (PBOC) first set up a task force to study a digital yuan in 2014. An alternative to fiat currency was driven by the growth of the digital economy and increased demand for technology, stating that an inclusive retail payment system meeting diversified payment needs is a public good. According to the paper:
“Such infrastructure will deliver better and more efficient basic financial services, ensure smooth domestic circulations, and support the building of a new development paradigm.”
China is expected to launch the digital yuan in time for the 2022 Winter Olympics. As the first major country to launch a CBDC, its design and uses in China and cross-border transactions will be closely watched. The PBOC will issue the currency to several commercial banks and manage the e-CNY through its entire life cycle. The currency will coexist with the physical renminbi and be a part of M0 (cash in circulation). The country has no intention of stopping or replacing the physical currency.
How will the digital yuan impact cross-border payments and international trade? While the PBOC has stated that the e-CNY has been designed for domestic retail payments and will explore cross-border payments in the future, there are several indications that the digital yuan will have implications beyond China’s borders.
The DCEP may make Chinese exports more competitive by eliminating fees and delays from payments while boosting domestic consumption through e-commerce purchases — all without having to exchange yuan into dollars first. This way, China would work around U.S. sanctions and trade tariffs, since the digital yuan will be available outside of China.
China’s Path to Currency Internationalization
The Belt and Road Initiative (BRI) seeks to improve connectivity and cooperation between Asia with Africa and Europe through various infrastructure projects. The project could also hasten economic development for many developing countries and, according to the World Bank, could increase global trade by as much as 6.2%. The BRI serves as a way for the digital yuan to be used in transactions, bypassing the U.S. dollar. According to The Institute for Security & Development Policy:
“The Belt and Road Initiative (BRI) is central to this goal: DCEP can be incorporated and promoted via the transactions carried out under the BRI corridors. Such cross-border use of the digital yuan could also critically extend China’s technological control and surveillance capabilities beyond its borders — making it a security concern for BRI participant states as well as other trade partners.”
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is the primary system for powering cross-border transactions between banks. The Brussels-based SWIFT is used by 11,000 banks and other financial institutions to quickly and securely send information.
Currently, 2.46% of international transactions cleared on SWIFT are settled in renminbi, up from 1.99% a year earlier. Nir Kshetri, professor for the Bryan School of Business and Economics at The University of North Carolina at Greensboro, spoke to Quantum Economics about China’s attempts to internationalize the renminbi, including the creation of the China International Payments System Service Corp. (CIPS).
“First launched in October 2015, CIPS is especially attractive for countries that are adversely affected by U.S. sanctions, including Iran and Venezuela,” he stated. “African nations that are receiving investments from China-led infrastructure projects under the BRI are also using the CIPS. Efforts such as the BRI and CIPS are attempting to make the global financial system more China-centric.”
To further the internationalization of the renminbi, China established a joint venture with SWIFT earlier this year. The Finance Gateway Information Services Company Limited is designed to bridge financial networks both within and outside of China. Other shareholders include CIPS and the Payment & Clearing Association of China, both supervised by the PBOC.
Another way for China to address cross-border fund transfer barriers, such as high costs, inefficiencies, and complex regulations, is through the mCBDC bridge, a way for China to connect the digital yuan with other currencies and markets. The project plans to develop a prototype for real-time cross-border foreign exchange transactions using distributed ledger technology through the central banks of Thailand, the United Arab Emirates, and Hong Kong.
Kshetri also noted how the operations of Chinese technology companies in developing countries have created long-term cooperative arrangements for China’s digital currency’s adoption, including the mobile handset market in Africa. Chinese companies account for about 50% of the mobile handset market and 70% of the mobile network infrastructures in Africa, giving China the ability to embed chips to facilitate China’s digital currency adoption in their handsets.
Another notable initiative is the project “ChinaStandards 2035,” which serves as a blueprint for setting standards for emerging and next-generation technologies such as 5G Internet, artificial intelligence and IoT. By setting such standards, China hopes to become the leader in design and innovation of these advancing technologies.
Chinese officials have continually stressed that the digital yuan is no different from the physical form of the fiat renminbi. Its objective in releasing the digital yuan is to keep up with technology. According to the PBoC in the white paper:
“The issuance and circulation of e-CNY is identical with physical RMB, while the value of the former is transferred in a digital form.”
This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.
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