Among the many benefits that China anticipated from hosting the 2022 Winter Olympics, one of the most important and subtle was the boost it would give its digital currency.
The Games would showcase China’s mastery of financial innovation, speed evolution toward a cashless society and, in its most ambitious design, undermine the U.S. dollar’s position as the global reserve currency. Those plans have been undercut by the COVID-19 pandemic, which restricted the number of visitors to the Games, but the ambition and vision are inescapable.
Governments have been studying digital currencies for over a decade, prodded by the digitalization of money and the growing number of private companies mediating financial transactions. Central reserve bank interest in central bank digital currencies (CBDCs) intensified and development accelerated after Facebook’s 2019 announcement that it would launch Libra, its own digital currency. (Facebook last month said that it was giving up that project, now called Diem, because of regulatory hurdles.)
Those efforts are motivated by traditional central bank concerns. There is, for example, the desire to increase efficiency in the financial system: Circulating actual coins and bills is expensive and time-consuming. They also want to ensure access to financial services as hundreds of millions of people around the world lack bank accounts — but a large percentage of them have cell phones, which can be used for digital currencies. They also want to prevent bad actors from financing their activities.
The core concern of central bankers is the stability of the national financial system. The digital era has introduced a new threat vector as private actors are responsible for a large and still increasing share of business transactions. Insolvency or bad behavior by these businesses could crash an economy. This is a critical distinction between a CBDC and cryptocurrency — one is backed by the full faith and credit of the government; the other is a speculative investment.
According to a January 2021 survey by the Bank for International Settlements, 86% of 65 central banks were actively engaged in some form of CBDC work and nearly 60% said it was either “likely” or “possible” that they would issue a CBDC for retail use in the next six years, almost tripling the 20% in the previous year’s survey. In the 2020 poll, 90% of the countries eager to get started were emerging economies. Cambodia and the Bahamas have launched a CBDC and a handful of others have pilot projects under way.
China has been studying digital currencies since 2014. Within three years, China’s central bank was working with commercial institutions to test a currency, and in late 2019 the Digital Currency Electronic Payment (DCEP, unofficially the e-yuan or e-CNY) was launched in several locations around China. In those pilot projects, the government gave out 34.5 billion Chinese yuan ($5.34 billion) to more than 20.8 million individuals. They, along with over 3.5 million organizations and companies, use an app (sometimes referred to as a wallet) on their phones to conduct transactions. The currency has been used for nearly 71 million payments in more than 1.32 million scenarios, which range from retail exchanges, payments for public transportation, utility bills or government services.
DCEP transactions reached $8.37 billion in the second half of 2021 and the app had been downloaded by 261 million individuals, nearly 20% of China’s population. While that is an impressive start, those numbers pale in comparison with private payment apps like Alipay or WeChat Pay, which service more than 800 million people in China, or 86% of mobile internet users. And users use the app a lot: Alipay processed $1.6 trillion in payments on average per month in 2020.
China’s promotion of the DCEP reflects the usual motivations and a few more. Mitsui Global Strategies reckons that 120 million people in China lack access to bank accounts; the government wants to fix that. There are hidden reservoirs of debt throughout the Chinese economy and a digital currency could provide better management and greater transparency of finance. Data from digital currency transactions would also provide unmatched insight into spending patterns and facilitate more effective management of the economy.
The private sector’s share of financial intermediation also worries Beijing. In addition to concerns about stability, the Chinese government is uneasy with any company acquiring power and influence that might rival its own. Or as one analysis concluded, the e-yuan lets the Chinese government rework “the terms of economic and political power with China’s tech giants.” CNAS, a U.S. think tank, warns that DCEP offers control over the market and by extension citizens’ financial data — the goal of every authoritarian government.
Equally important for Beijing are the international dimensions of the e-yuan. China recognizes that internationalization of its currency is a critical indicator of global status and power. Beijing knows that U.S. might — and its capacity to impose pain on China — is a function of the dollar’s status as the world’s reserve currency. China wants to blunt Washington’s most powerful weapon.
It’s making progress. A little over a decade ago, China settled almost none of its trade in yuan; by 2019, 13.4% of goods and 23.8% of services trade was paid in the Chinese currency, reaching nearly 20 trillion Chinese yuan. The result, reports Charles Gave of Gavekal Research, is the emergence of “Asia’s new monetary order” as China’s trade with Asian and African nations is billed increasingly in yuan.
Still, the yuan accounts for just 2.5% of global foreign exchange reserves, while the dollar makes up 59.5%. The dollar remains predominant, but its lead is eroding.
China’s problem is the Beijing government’s ambivalence about loosening its grip on the currency to actively promote a global yuan. The last time China tried real liberalization it was forced to backtrack after $1 trillion rushed out of the country in a few months. The DCEP could ease some of those concerns.
The currency would facilitate cross-border payments for Chinese companies, a market that is rapidly expanding in tandem with the Belt and Road Initiative. Once those countries get comfortable with international exchange using the DCEP, they could use it internally, the way that some countries use the greenback. Acceptance would ease investment in Chinese bonds and securities and allow commodities to be priced in yuan, eliminating exchange rate risk and exposure to U.S. authority through use of the dollar.
An article in China Finance, a magazine published by the PBOC, called the race to develop a CBDC “a new battlefield” in the strategic competition between nations. The Mitsui report cites a Japanese banker who argued that China doesn’t aim to displace the U.S. or internationalize the yuan but rather wants to set global CBDC standards in technology and mechanisms. That is consistent with President Xi Jinping’s call for China to “actively participate in formulating international rules on digital currency and digital tax to create new competitive advantages,” and his urging the Group of 20 “to discuss developing the standards and principles for central bank digital currencies.”
China was the first to add digital currency-related content to the repository for ISO 20022, a global standard covering information transferred between financial institutions that includes payment transactions, securities trading and settlement and credit and debit card data. The PBOC has also begun working with central bankers in Hong Kong, Thailand and the United Arab Emirates to create a digital ledger that would make it easier to conduct multicurrency cross-border payments.
All this is behind Beijing’s effort to make the 2022 Winter Olympics another DCEP pilot project. Participants in the Games have been given gloves and smart watches with built-in payment functions to facilitate use of the e-yuan. The organizing committee pressed companies and Olympic sponsors to accept the e-yuan during the Olympics, joining cash and Visa cards (an official sponsor of the Games) as payment options in the Olympic Village.
Not all governments are as enthusiastic as China. A recent report from the U.K.’s House of Lords called CBDCs “a solution in search of a problem.” And while the U.S. Federal Reserve, the Bank of England and the European Central Bank joined an international effort to discuss common principles and key features of a CBDC and its supporting infrastructure, all are watching developments before they take additional action.
Japan joined the international study, but the Bank of Japan isn’t committed to a digital currency, although it has “initiated an experiment for a general purpose CBDC,” the second phase of which will begin this spring. Unlike other countries, demand for cash continues to grow here, which undercuts some of the rationale for a CBDC, although Japan will have to have a system in place if other countries embrace digital currencies. Otherwise, it will be pushed to the periphery of the global financial order. Such are the stakes as China presses its campaign to develop its digital currency.
Brad Glosserman is deputy director of and visiting professor at the Center for Rule-Making Strategies at Tama University as well as senior adviser (nonresident) at Pacific Forum. He is the author of “Peak Japan: The End of Great Ambitions” (Georgetown University Press, 2019).
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