THE PEOPLE’S BANK OF CHINA has been experimenting with a sovereign digital currency since April. Last week, it conducted a showy trial in Shenzhen to coincide with President Xi Jinping’s visit for the former fishing village’s 40th anniversary of its transformation into the first special economic zone.
The central bank gave away 10 million yuan ($1.5 million) of its digital yuan, formally called Digital Currency Electronic Payment (DCEP), to 50,000 randomly chosen residents to spend in Shenzhen shops. The test, the largest to date of the digital yuan, reportedly went without a hitch.
Central bank digital currencies (CBDCs) are gaining attention globally. China’s progress in implementing one is pushing the US Federal Reserve and the European Central Bank to speed up work on their digital dollar and digital euro, respectively.
Cash is already fading in China as a medium of exchange, with mobile and cashless payment commonplace, notably via Alipay and WeChat. Four out of five payment transactions already happen via mobile devices.
Beijing has other reasons for favouring the development of a CBDC.
First, it will improve authorities’ ability to manage the money supply. Second, it will help track financial transactions. That will help with everything from combatting corruption and money laundering to monitoring the distribution of international aid. It also potentially expands the toolbox for domestic social control once the use of digital yuan is widespread, as it is likely that only digital wallets authorised by the central bank and issued by one of the big four state-owned banks will be allowed.
Third, it opens the possibility of an international payments system independent of the dollar, and thus immune to US financial sanctions. In that regard, a digital yuan would provide some of the transactional advantages of an internationalised yuan without all the disadvantages of losing capital controls. Internationalisation of the currency remains a long-term goal for Beijing but is not a short-term priority.
For most countries, the main challenges to issuing a CBDC are not technological, but political and regulatory. A second-order regulatory effect will be that CBDCs will advance the digitalisation of all financial assets. Thus there will be a need for more all-embracing regulatory scrutiny of all cryptocurrencies and other digital financial instruments.
China may have an advantage on both points, thanks to the Party’s monopoly on power and the country’s monopolistic internet platforms.
Widespread adoption will also require collaboration between governments and private-sector technology platforms. The PBOC is already exploring with online local shopping platform Meituan and ride-hailing app Didi Chuxing applications for their services.
The next step will be large-scale tests in cities like Hong Kong, Shanghai and Beijing, with the 2022 Winter Olympics in Beijing providing an ideal international showcase for a national launch.