China Is Leading the Digital Currency Race
How that happened, and why the rest of the world needs to act now unless we want to forfeit leadership in global payments to the e-CNY.
Alongside the athletes who gathered from around the world to compete in physical displays of strength and skill, China flexed its proverbial muscle in the global economy by creatively rolling out the digital version of the yuan at the February 2022 Olympic Games.
The Olympic hosts provided athletes with ski gloves and smartwatches that included built-in digital payment functions utilizing only the e-CNY, and they limited other payment methods within the Olympic Village. Their goal was to spread the digital yuan beyond Chinese citizens.
China’s release to the public of the e-CNY made it the first economic superpower to issue a central bank digital currency (CBDC). The move lapped the United States and Europe, which are mired in political back and forth and risk analysis around how to introduce CDBCs into their economies without creating instability.
By contrast, the Chinese government has bet that the fastest across the finish line will win the race for financial innovation. They may have a point. First movers usually have an advantage over new players in any arena, and the digital payments ecosystem is no different.
The government of China has stated that its CBDC will be primarily used domestically, with the goal of enabling financial inclusion for the nation’s unbanked population. However, it’s not unreasonable to conclude that other sociopolitical plays are also afoot. China has numerous paths for taking the e-CNY show on the road for international adoption—and expanded geopolitical influence would likely come along for the ride.
One sign that domestic concerns may not be the only driver of China’s early foray into the world of CBDCs is that the country has ignored the Bank of International Settlement’s (BIS’s) request that central banks “consider interoperability when designing CBDCs so that the digital currencies can be effectively adapted for future cross-border use.” China has been participating in cross-border and interoperability working groups. At the same time, China has been trying to monopolize those experiments and has offered only limited collaboration and cooperation around other digital currencies and payment methods.
Despite the Olympic tie-in, the rollout of the e-CNY was lackluster. Mu Changchun, director-general of the People’s Bank of China’s Digital Currency Research Institute, said transactions reached 2 million digital yuan (about US$315,000) per day at the Olympics. Much of the e-CNY spending was by Chinese residents, who were banned from using the country’s two dominant payment apps, AliPay and WeChat Pay, due to the International Olympic Committee’s rules about sponsorship and a great deal of government strong-arming of companies to limit their payment options.
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It’s fair to assume that, while establishing China as far ahead of the world’s other economic superpowers, the rollout of the digital yuan didn’t achieve the gold medal the government was hoping for. The e-CNY, like the Olympic Games overall, ran headfirst into Covid-19 restrictions, including strict limitations on international visitors and spectators. The daily payment volume via digital yuan would likely have been much higher if the games had normal attendance levels. In addition, Western government representatives had issued strict warnings to their athletes to avoid using the e-CNY for fear of government surveillance and tracking.
Although China is the largest economy to roll out a CBDC so far, it is by no means alone in this journey. The Bahamas quietly took the brave step of being the first to launch a digital currency when they released the Sand Dollar—the digital iteration of the Bahamian dollar—at the end of 2020.
Taiwan has announced plans to build and test a prototype; that work is expected to wrap up in September. And both Russia and India are moving full steam ahead with a digital ruble and digital rupee, respectively. Both countries’ central banks are determined to use legal prohibitions to eliminate as many competing cryptocurrencies as possible.
A reluctance to be nimble and adapt to changing times, coupled with a paralyzingly polarized political climate, have resulted in the United States abdicating our leadership role in the world.
Concerns around CBDCs are not unwarranted: The currently available technology is highly energy-intensive. Plus, privacy and free speech are much greater concerns to the United States than to the People’s Bank of China. Nevertheless, we cannot assume the U.S. and Europe will remain leaders in the payments space if we are slow to launch our own CDBCs.
It is essential to show that innovation and progress do not have to come at the expense of privacy and democracy. Governments that are committed to leading the 21st century must choose to change what seems like the current strategy of forfeit—and to do so immediately.