While much of the world is transfixed with blockchain-mania, China appears to be making strides in a different direction with the introduction of the first national digital currency. A New York Times article published on March 1st details the release of the digital Yuan, which is currently being tested in cities across China, including Beijing and Shanghai.
Unlike digital cryptocurrencies which are powered by a decentralized distributed ledger system, the digital Yuan is issued and backed by the authority of the People’s Bank of China. For the average consumer, the digitization of the Yuan provides faster and more convenient payments through a QR code that is tied to the user’s bank account. For the Chinese government it likely means tighter oversight of financial transactions and expanded opportunity to collect personal data on their citizens, or for that matter anyone who uses the currency.
It is not an accident that out of all countries China was the first to stage such an experiment, as digital currency kills multiple birds with one stone for a government that famously seeks to run a planned economy and is fond of surveilling all aspects of its citizens’ lives. It also helps that Chinese consumers are more accustomed to making digital payments with apps such as Wechat Pay and Alipay dominating much of the payments ecosystem. Developments in China offer testing ground for a trend that may soon unfold across the rest of the world:
Over the last 12 months, more than 60 countries have experimented with national digital currencies, up from just over 40 a year earlier, according to the Bank for International Settlements. The countries include Sweden, which is conducting real-world trials of a digital krona, and the Bahamas, which has made a digital currency, the Sand Dollar, available to all citizens.
In contrast, the United States has moved slowly and done just basic research. At a New York Times event last week, Treasury Secretary Janet L. Yellen indicated that might change when she said an American digital currency was “absolutely worth looking at” because it “could result in faster, safer and cheaper payments.”
In the summer of last year, the Federal Bank of Boston has announced a collaboration with the MIT Digital Currency Initiative to explore the potential benefits and pitfalls of a digital dollar. The collaboration is an optimistic sign as it sends a signal that U.S central bankers are taking the idea of a digital currency seriously and may soon be ready to take the steps to make it a reality. Digitizing the dollar may be crucial to ensuring that it stays competitive as the world’s currency in the digital age.
Boston Fed Assistant Vice President stated that a digital currency may prove to be beneficial for making government disbursements and overseas money transfers more efficient. In the meantime Chinese central authorities are already reaping the benefits of the data-rich digital footprint that comes from the digital Yuan.
“This is about more than just money,” said Yaya Fanusie, a fellow at the Center on Economic and Financial Power, a think tank, and an author of a recent paper on the Chinese currency. “It’s about developing new tools to collect data and leverage that data so that the Chinese economy is more intelligent and based on real-time information.”
While the Chinese government has not said if and when it will officially introduce the eCNY nationwide, several officials have mentioned having it ready for tourists visiting for the 2022 Olympics in Beijing. Recent articles and speeches from officials at the People’s Bank of China, which is the country’s central bank, underscored the project’s ambitions and the desire to be first.
“The right to issue and control digital currencies will become a ‘new battlefield’ of competition between sovereign states,” read an article in China Finance, the magazine of the central bank, in September. “China has many advantages and opportunities in issuing fiat digital currencies, so it should accelerate to seize the first track.””
Those that are concerned by China’s rise as a major political and financial player on the global stage better hope that major G20 countries are able to prioritize digitizing their money, ensuring a place for their currency in the (digital) reserve vaults of the world’s central banks.
Overview by Sam Klebanov, Research Analyst at Mercator Advisory Group