As China pushes its digital currency plans, the US falls behind
China’s digital Yuan project, a blockchain-based cryptocurrency for consumer and commercial finance, can no longer be considered a pilot. That’s the assessment by economic and cryptocurrency experts.
Those experts have been monitoring efforts in China and other countries developing and piloting central bank digital currencies (CBDCs) with the aim of establishing a blockchain-based virtual cash that is cheaper to use and faster to exchange, both at home and across international borders.
To date, the People’s Bank of China has distributed the digital yuan, called e-CNY, to 15 of China’s 23 provinces, and it has been used in more than 360 million transactions totaling north of 100 billion yuan, or $13.9 billion. The country has literally given away millions of dollars worth of digital yuan through lotteries, and its central bank has also participated in cross-border exchanges with several nations.
If e-CNY continues to be adopted and becomes the de facto standard for international commercial and retail payments, the privacy of those using digital currency, as well as the US dollar’s days as the world’s reserve currency, could be at risk.
Whatever nation figures out internationally accepted financial transaction network for digital cash will be the one to set the standards around it, “and then everyone else will have to follow them,” said Lou Steinberg, former Ameritrade CTO and managing partner at cybersecurity research firm CTM Insights. “Those standards will be designed with what the developer of them wants to accomplish. Surveillance could be built in.
“China wants digital cash because it’s another tool to monitor citizen behavior — how much do you spend at the liquor store, do you go to the movies, and which ones?” Steinberg continued. “If all transactions are recorded and tied to your account, they know a lot. A similar concern about government monitoring exists in the US, though the motives for monitoring may differ from an authoritarian state.”
The US has been considering creation of a digital representation of the dollar for nearly three years. In March, President Joseph R. Biden Jr. issued an executive order that, among other things, called for more urgency on research and development of a US CBDC, “should issuance be deemed in the national interest.”
In November, the New York Federal Reserve Bank began developing a wholesale CDBC prototype. Named Project Cedar, the CBDC program hammered out a blockchain-based framework expected to become a pilot in a multi-national payments or settlement system. The project, now entering phase 2, is a joint experiment with the Monetary Authority of Singapore to explore questions around the interoperability of the distributed ledger.
“I don’t think we’re treating this like a Moonshot,” Steinberg said. “The Fed’s not saying this is the future, like it or not, and we need to have a say in how it unfolds, and therefore it becomes the most important thing we do.”
The blockchain technology that underpins digital cash projects is the same as that used for Bitcoin and Ethereum cryptocurrencies. The difference is that CBDCs, like traditional cash, are backed by a central bank’s authority, which is why they’re called central bank digital currencies.
Distinct from online retail payments, such as those made via a mobile device, wholesale cross-border payments are transactions between central banks, private sector banks, and corporations. Cross-border spot trades (or immediate payments) are among the most common wholesale payments, as they are often required to support broader transactions, such as for international trade or foreign asset investment.
While the US has made some advances toward creating a CBDC, it still lags far behind other nations.
For example, Project Dunbar brings together the Reserve Bank of Australia, Bank Negara Malaysia, Monetary Authority of Singapore, and South African Reserve Bank with the Bank for International Settlements (BIS) Innovation Hub to test the use of CBDCs for international settlements.
“We’re looking at 13 current wholesale projects with different arrangements between countries,” said Christian Catalini, the founder of the Cryptoeconomics Lab at the Massachusetts Institute of Technology (MIT). “The United States is clearly behind. Part of that is because there’s not a consensus that a CBDC is needed or useful. There’s only one clear nation leading the effort when it comes to both the scale of its experiment and its progress to date, and it is China.”
E-CNY is a digitized version of China’s cash and coins and, like other CBDCs, it was deployed on a blockchain distributed ledger — an online, distributed database that tracks transactions. That database uses encryption to ensure online cash and coins exchanged through it are tamper-proof, meaning only users with access to specific private-public keys can participate in the transaction. In real terms, for retail that could look like a QR code on a smartphone being used to make a purchase in a store. Or it could be a corporation transmitting a public key code that allows for a specific monetary exchange.
In 2020, the Atlantic Council, a Washington DC-based think tank, began tracking 35 CBDC projects. Today, it’s watching 114 CBDC projects globally, measuring their progress based on four stages: research, development, pilot, and launch. China’s e-CNY currency has been in the pilot stage since 2020, when it announced the digital currency at the Beijing Olympics. (China has been exploring creating a digital currency since 2014.)
The greener the regions, the more advanced the CBDC projects.
“Over a span of two years, the world’s leading central banks have gone from skeptical to serious about a government form of digital currency,” the Atlantic Council said last month.
Ananya Kumar, assistant director of digital currencies at the Atlantic Council’s GeoEconomics Center, said the Asian region in general and nations such as China, Thailand and the UAE, have the most advanced CBDC projects.
For the US to actually develop and pilot its own retail CBDC — one that could be used by consumers — it would need congressional action that authorizes the Federal Reserve to move forward, “and we’re nowhere near that,” Kumar said.
While China’s e-CNY project may be out of pilot, the billion-plus yuan transferred using over its blockchain ledger isn’t as monumental as it may seem. Those transfers over the three-year life of the e-CNY rollout are only one-third of that transferred across Alibaba and Tencent Pay — China’s two largest mobile payment processors — in a single day. “So, comparably, it’s a very small number of transactions,” Kumar said.
While not yet a reality, in theory there is a threat to the US dollar because other nations developing their own CBDC networks could more easily transact without it. “We see this because there’s been double the number of wholesale CBDC projects launched over the course of this year,” Kumar said.
“Since the invasion of Ukraine, and sanctions packages unveiled against Russia, countries are trying to figure out what to do if that happens to them and how do they build a system against it,” Kumar added.
Financial rails, or clearance and settlement systems such as SWIFT in place today, honor sanctions imposed by NATO nations. But as CBDCs become more widely adopted, nations such as Russia, North Korea, or China could ignore those sanctions by using digital currencies not regulated by the US or its allies.