October 27, 2021
More global CBDC adoption, cross-border payment growth and more security and privacy concerns could all be downstream effects, experts say.
Good afternoon! Beijing is getting serious about a centrally backed digital currency, one that its central bank, the People's Bank of China, has been rolling out on a test basis in several major Chinese cities. Ultimately, the existence of a state-backed "digital Yuan," or e-CNY, could create a large, international platform for electronic payments that live on the blockchain. If that happens, what does this ultimately mean for the rest of the world, which still settles most international payments with the U.S. Dollar? This week, we asked five leading experts. Questions or comments? Send us a note at email@example.com.
Co-founder at Skuchain
China is one of the few countries that affirmatively believes technology is becoming far more important than money, or at least the traditional idea of it. In issuing a digital yuan, China is not looking to directly unseat the U.S. dollar as the reserve currency. Rather, Beijing wants to increase the use of RMB offshore to slowly reorient an international financial infrastructure centered on the U.S. and its economic leadership.
In addition to rolling out the digital yuan in domestic pilots, China has made use of the digital yuan a condition in the Regional Comprehensive Economic Partnership, a successor to the Trans-Pacific Partnership that includes China and not the U.S. Trading partners in Asia are already starting to prefer the digital yuan in cross-border payments with Chinese companies because of its convenience and a simpler onboarding process compared to more traditional financial products. Cutting-edge financial technology offers such advantages, similar to the forces that enabled technology in other sectors to grow and scale despite concerns from governments and other powerful interests.
Now, economics does matter. There are several reasons why the U.S. dollar is the most sought-after currency and will be for some time. However, China is betting that the digital yuan is another arrow in its quiver to strengthen influence around the world and diminish U.S. ability to counteract it. More importantly, it is accelerating a reality first broached by cryptocurrency that with the right technology, you can create your own money and the rails to move it.
Scholar, Carnegie Endowment for International Peace
Beijing's CBDC efforts could spur the proliferation of new cross-border payments infrastructure that undermines U.S. interests. This happening depends on whether the e-CNY (China's CBDC) becomes interoperable with other countries' payments systems and how Washington responds to growing global interest in CBDCs.
In addition to domestic-focused CBDC objectives, Chinese officials hope that the e-CNY will enable low-cost cross-border payments that circumvent today's dominant bank-based payments channels, which Washington can shut off to U.S.-sanctioned entities. Officially, the e-CNY is "ready for cross-border use"; and in theory, a large share of China's cross-border trade payments could be made using e-CNY without changes to capital controls. But if e-CNY cannot easily be exchanged with other currencies or used abroad, its attractiveness for cross-border payments is limited.
Emerging policy developments may address this dynamic. Beijing's 14th five-year plan calls for China to help develop global digital currency standards. China's central bank is leading the technology committee of a multi-CBDC arrangement with Thailand and the UAE that, if successful, could dramatically lower cross-border CBDC payment costs. Perceived Chinese CBDC successes could lead to emerging markets, underserved by dominant payments channels, launching CBDCs compatible with China's.
A global network of similarly-structured CBDCs could ultimately facilitate lower-cost payments relative to U.S.-regulated channels, thus diminishing the power of U.S. sanctions and curbing dollar usage in cross-border trade. But such outcomes are less likely if Washington boldly encourages private sector innovation aimed at reducing cross-border payments costs and works to prevent global CBDC standards that harm U.S. interests.
Senior Fellow at the Atlantic Council
China's CBDC pilot has turned heads in financial and national security circles. While Beijing's efforts to denominate loan repayments in a digital yuan and nascent cross-border trials are worth careful monitoring, the digital currency will not pose a serious threat to the international monetary and banking system absent concessions from China on capital markets and monetary sovereignty. Chinese market regulation appears to be heading decidedly in the opposite direction. The international economy remains overwhelmingly dollarized and over the short to medium term this is unlikely to change.
Similarly, the digital yuan has raised concerns over systemic sanctions evasion if transactions are settled completely outside the dollar system. While this is theoretically possible, it's important to remember, especially after the recent publication of the Pandora Papers, that laundering money and evading sanctions is already quite easy using the myriad loopholes of the current commercial banking system and complex web of financial service providers.
The greater risk is that China provides an effective model for employing centralized financial technology as an arm of its surveillance state. Beijing's crackdown on domestic payments systems such as Alibaba and Tencent is an effort to transfer the troves of data currently held by private services providers to the government. While Western governments have been clear that any CBDC they design will adhere to strict privacy rules, other authoritarian regimes globally might emulate this new surveillance tool. At that point CBDC becomes less an instrument of effect payment than a bedfellow of artificial intelligence.
Managing Director at CoinDesk
The rapid development of China's digital yuan is compelling other countries to consider doing the same. In that sense, China may be helping to drive the adoption of central bank digital currencies worldwide.
Sure, some governments might have done it anyway. But China may be spurring others to act faster. This appears to be a consideration behind Japan's digital yen, for example, and the U.S. government is also keenly aware of China's moves. Fed Chair Jerome Powell has even made a point of saying that the development of U.S. digital dollar should not be a race against China, and that the U.S. should take its time to make the right decision. But the fact that Powell mentioned China at all indicates that the digital yuan is looming in the backdrop of U.S. policy discussions. The Federal Reserve will soon come out with a report exploring the risks and opportunities of a central bank digital currency. If China were not a factor, would the Fed be seriously considering a digital dollar at all?
A digital yuan could make China's internal payments and data collection more efficient. It could be used for international payments, potentially paving the way for money to be exchanged without relying on the SWIFT messaging network. As other countries ponder what the digital yuan might accomplish domestically and internationally, they will fear missing out.
Senior Fellow at the Peterson Institute for International Economics
Many in Washington, Wall Street and around the world are worried about China's "lead" as the furthest major nation towards launching a central bank digital currency. China has now trialed its CBDC with millions of consumers across the country, and is widely expected to expand the rollout for the Olympics. Yet, the international implications for the next decade at least are most likely to be psychological than any real threat to the United States or the dominance of the U.S. dollar. Despite very early-stage projects aiming to connect CBDCs, China's is primarily a domestic initiative, meant to wrest control of financial infrastructure from Alipay and WeChat Pay, lower payment costs and advance financial inclusion.
If Beijing wants it to take on the dollar for cross-border transactions or reserves, it will need to achieve two difficult tasks. First, it will need to loosen its tight restrictions on capital movement, which make it unattractive as a reserve currency. Reserves Beijing can lock up in China are not reserves, because you can't rely on them in a time of stress. The prospects for such a change are dim, as China has shown more interest in domestic stability than foreign opening. Second, to be truly faster and cheaper than the current USD system, it will need to develop an immense ecosystem around the digital RMB, including deep and liquid foreign exchange markets and financial derivatives, both of which are far from purely technological problems.
David Wertime is Protocol China's former executive director. David is a widely cited China expert with twenty years' experience who has served as a Peace Corps Volunteer in China, founded and sold a media company, and worked in senior positions within multiple newsrooms. He also hosts POLITICO's China Watcher newsletter. After four years working on international deals for top law firms in New York and Hong Kong, David co-founded Tea Leaf Nation, a website that tracked Chinese social media, later selling it to the Washington Post Company. David then served as Senior Editor for China at Foreign Policy magazine, where he launched the first Chinese-language articles in the publication's history. Thereafter, he was Entrepreneur in Residence at the Lenfest Institute for Journalism, which owns the Philadelphia Inquirer. In 2019, David joined Protocol's parent company and in 2020, launched POLITICO's widely-read China Watcher. David is a Senior Fellow at the Foreign Policy Research Institute, a Research Associate at the University of Pennsylvania's Center for the Study of Contemporary China, a Member of the National Committee on U.S.-China Relations, and a Truman National Security fellow. He lives in San Francisco with his wife Diane and his puppy, Luna.
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