The e-Yuan and the Rise of National Digital Currencies

In an increasingly digitized economy, the COVID-19 pandemic has furthered the prevalence of online transactions, contributing to the rise of digital currencies. From decentralized cryptocurrencies like Bitcoin to Facebook’s highly anticipated semi-centralized Libra , various up-and-coming actors are attempting to emulate the success of field leaders and tap into the various advantages of proprietary currency. More recently, major central banks have also recognized the potential of this technology, and many are developing digital versions of existing currencies.

 These projects offer a unique opportunity for central banks to facilitate the transition to a digital model, while keeping up with the growing power of decentralized currencies. An early adopter, Sweden is one of the first to consider introducing its e-Krona to the finance world. Other countries are following suit, as the EU is reportedly working on a digital version of the Euro. However, none are as advanced as the People’s Bank of China’s (PBOC) Digital Yuan initiative. With multiple trials throughout 2020, the PBOC is considering a nationwide implementation of the e-Yuan as early as 2021. 

 These e-currencies fall under the designation of Central Bank Digital Currency (CBDC). While CDBC share certain characteristics and technologies with cryptocurrencies, they aren’t indistinguishable. CDBCs are centralized and regulated by one institution, whereas cryptocurrencies such as Bitcoin pride themselves on decentralization and self-verification of online transactions. On a fundamental level, CDBCs are a digital implementation of physical cash. They are retrieved from an account through a “digital ATM,” added to an e-wallet, and then used in regular transactions without involving bank services providers. In some cases, these transactions can even be completed without an internet connection. Similar to regular cash, the central bank regulates these digital tokens with e-wallets, which are comparable to traditional bank accounts. Most of the latest governmental CDBC projects also make use of the latest encryption and validation methods for secure implementation; Sweden’s e-Krona, for instance, uses the same underlying blockchain architecture as Bitcoin. 

Although the People’s Bank of China claims the e-Yuan is not technically a CDBC, the currency is functionally identical to other projects under this designation, except for some differences in implementation. For instance, China does not plan on leveraging blockchain validation for the e-Yuan following concerns that the technology could not handle the volume of transactions across the entire country. Instead, the PBOC will make use of standard transaction verification within a proprietary database. The Chinese Communist Party has overseen successful trials in Chinese cities, where participants received an e-wallet with a fixed amount to spend in designated stores. While nationwide implementation dates are not yet disclosed, such trials show the readiness and applicability of this currency.

 A CDBC’s main selling point is to provide easy and free online payment methods, without a bank acting as the “middle man.” For the Chinese government, the e-Yuan is a way to provide banking services and secure transactions to marginalized populations who lack consistent access to banks. Additionally, China sees this currency as a means to rival SWIFT, the American-led communications service that regulates the vast majority of the world’s online transactions. In the same vein, the digital Yuan aligns with China’s ambitious political agenda, as it may well challenge the hegemony of the US dollar as the world’s reserve currency.

With this free online transaction model, governments are using digital currencies to curb the growth of decentralized cryptocurrencies that threaten central banks’ control over the economy. CDBCs offer an alternative for bank-free online transactions, one of the aspirations of cryptocurrencies. While the CCP shows reticence to Bitcoin, the e-Yuan is designed to keep society’s digital transition under the Chinese government’s control. In fact, the large volume of CDBC projects in recent development may indicate a direct attempt by central banks and governments to respond to the growing popularity of cryptocurrencies. In any case, central banks are exploiting the growing familiarity of the public with crypto to make their CDBCs more accepted by the general population.

Cracking down on illegal transactions and money laundering is of high importance to the Chinese National Bank; a digital currency that makes use of advanced transaction validation could go a long way towards reaching such goals. Moreover, Central Bank Digital Currencies’ built-in traceability would provide a clearer picture of the local economy, allowing for more informed regulatory processes to take place. The digital nature of such currencies might also prove important in times of economic uncertainty, as e-currencies are more flexible and adjustable than physically-backed currencies.

At the forefront of national digital currency development, the e-Yuan represents the future of nationwide currency, edging on a pivotal global economic transition. As the Chinese government runs through more successful trials, a digital transformation of the Yuan in the near future is highly likely, with other countries following suit. From improving quality of life to furthering geopolitical ambitions, CDBCs will be extremely valuable for central governments throughout the digitalization of the world economy and the rise of cryptocurrencies.

In the short term, CDBCs most likely won’t have a drastic impact on society; their primary goal is to replace cash, which is already becoming increasingly rare. Further down the line, they might result in a more widespread access to financial services and an even higher volume of online transactions.

 However, in the long run, these currencies might drastically impact the global economic landscape. They could represent strong competition for popular cryptocurrencies and may ultimately curb their growth. Non-governmental established banking institutions could face some hardships, including being short-circuited out of certain online transaction models or having to adapt to consumers storing their assets in Central Bank e-wallets. With their centralized and simplified economic ambitions, these e-currencies could restructure some aspects of the financial world. As an example, digital payment companies such as AliPay will likely be hit very hard, with CBDCs invalidating their business model.

 In the e-Yuan’s case, the geopolitical implications are also considerable, as the project furthers China’s aspirations of economic self-sufficiency and hegemony as an alternative to Western-dominated international online transactions. The growth of national digital currencies could lead to increased economic sovereignty for many nations, and a less centralized global distribution of economic power.

 As digital currencies rise in importance throughout the financial world, CDBCs are becoming increasingly important to central governments in the race to digitalization. Aside from their goals of a cashless society, the actors behind national e-currencies also harbor further-reaching aspirations, ranging from pushback against cryptocurrencies to shifting the established global banking model.