The rapid evolution of cryptocurrencies might represent a threat to monetary sovereignty and global financial stability, but how will institutions respond? China is ready. It has already rolled out a pilot program for its own central bank digital currency (CBDC) involving more than 500,000 people, and it is about to initiate cross-border payments with the ambition of assuming a leading role internationally.
When Facebook announced its cryptocurrency project Libra (now Diem), central banks were forced to take notice. The emerging risk to monetary sovereignty and global financial stability prompted institutions to start or accelerate initiatives related to CBDCs. In fact, 80 percent of central banks are currently engaged in research and development of CBDCs, according to a survey conducted by the Bank of International Settlements. However, despite a growing interest in CBDCs, there remain valid concerns about the impact of their potential introduction on financial intermediaries, payment systems and, more generally, on public perception.
China is the first major economy to have its own CBDC, while the European Central Bank’s (ECB) and the US Federal Reserve’s CBDC projects are still in their infancy. Meanwhile, the People’s Bank of China (PBOC) launched its digital currency pilot program in 2020 in major cities like Shenzhen, Suzhou and Chengdu and is now getting ready to roll out the use of the digital yuan on a larger scale in time for the Winter Olympics in Beijing 2022.
The introduction of the digital yuan is a challenge to the duopoly of the digital payments sector, which has so far been dominated by AliPay and WeChatPay, which account for 94 percent of the market in China. The PBOC kept AliPay and WeChatPay out of the digital currency pilot program but included many other private stakeholders, including six major Chinese banks and the most popular apps, such as JD.com (the country’s largest online retailer), to test digital wallets. More than 500,000 thousand people downloaded an app that allowed them to experiment with making small digital currency payments. The pilot program highlighted the market potential of a digital yuan, according to a report by Goldman Sachs, with the US investment bank stating that in ten years China’s digital currency could reach one billion users and represent 15 percent of total domestic electronic payments.
But its potential is not limited to China’s domestic market alone, with the government preparing to exploit its first mover advantage outside national borders. The use of the digital yuan in cross-border payments could have significant geopolitical consequences. It is not by chance that last February China, together with the United Arab Emirates, joined the Multiple CBDC (m-CBDC) Bridge initiative, a project co-created by the BIS Innovation Hub, Hong Kong Monetary Authority and the Bank of Thailand with the aim to facilitate real-time foreign currency payments using distributed ledger technology. The widespread use of digital currencies in international trade could undermine the hegemony of the US dollar and strengthen China’s role in global markets.
In response, the ECB is adopting a prudent approach and recognises the importance of developing its own CBDC project but is cautious about the timing of its launch. After having published a report on the digital euro, the ECB opened a public consultation aimed at citizens and professionals, which highlighted privacy, security, and ease of use as the most critical areas in the current design phase. In the coming weeks, the ECB’s Governing Council will take a decision on whether to continue with the project and, if so, will define a timeline for the development and implementation of the digital euro, which, in any case, will not be issued before 2025.