China’s Digital Yuan Project, a blockchain-based cryptocurrency for consumer and commercial finance, can no longer be considered a pilot. That is the assessment of financial experts and cryptocurrency experts.
These experts have overseen efforts in China and other countries to develop and pilot 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 domestically 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 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 the central bank has also engaged 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 the digital currency, as well as the days of the US dollar as the world’s reserve currency, could be at risk.
Whichever nation figures out the internationally accepted financial transaction network for digital cash will be the one to set the standards around that, “and then everyone else will have to follow them,” said Lou Steinberg, former CTO of Ameritrade and managing partner at cybersecurity research firm CTM Insights . “These standards will be designed with what their developer wants to achieve. Monitoring can be built in.
“China wants digital cash because it’s another tool to monitor citizens’ 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 linked to your account, they know a lot. A similar concern about government surveillance exists in the United States, although the motives for surveillance may differ from an authoritarian state.”
The United States has been considering creating 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 in research and development of a US CBDC, “should issuance be considered in the national interest.”
In November, the New York Federal Reserve Bank began developing a wholesale CDBC prototype. The CBDC program called Project Cedar hammered out a blockchain-based framework that is expected to become a pilot in a multinational payment or settlement system. The project, now entering Phase 2, is a joint experiment with the Monetary Authority of Singapore to explore issues surrounding the interoperability of the distributed ledger.
“I don’t think we’re treating this as a moonshot,” Steinberg said. “The Fed is not saying this is the future, like it or not, and we have to have a say in how it unfolds, and so that becomes the most important thing we do.”
The blockchain technology that underpins digital cash projects is the same one used for Bitcoin and Ethereum cryptocurrencies. The difference is that CBDCs, like traditional cash, are backed by the authority of a central bank, which is why they are called central bank digital currencies.
Unlike online retail payments, such as those made via a mobile device, cross-border wholesale payments are transactions between central banks, private sector banks and companies. Cross-border spot trades (or spot 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 United States has made some progress toward creating a CBDC, it is still far behind other nations.
For example, Project Dunbar brings together the Reserve Bank of Australia, Bank Negara Malaysia, the Monetary Authority of Singapore and the South African Reserve Bank with the Bank for International Settlements (BIS) Innovation Hub to test the use of CBDCs for international settlements.
“We are 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 is no consensus that a CBDC is necessary or useful. There is only one clear nation leading the charge when it comes to both the scale of the experiment and its progress to date, and that is China.”
e-CNY explained
E-CNY is a digitized version of China’s cash and coins, and like other CBDCs, it was distributed on a blockchain distributed ledger – an online, distributed database that tracks transactions. This 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 might look like a QR code on a smartphone used to make a purchase in a store. Or it could be a company sending a public key code that allows a specific money exchange.
In 2020, the Atlantic Council, a Washington DC-based think tank, began tracking 35 CBDC projects. Today, it sees 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.)
Atlantic CouncilThe greener the regions, the more advanced the CBDC projects.
“In the space of two years, the world’s leading central banks have gone from skeptical to serious about a sovereign form of digital currency,” the Atlantic Council said last month.
Ananya Kumar, associate 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 U.S. to actually develop and pilot its own retail CBDC — one that could be used by consumers — it would need congressional action authorizing 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 billions of yuan transferred over the blockchain ledger is not as monumental as it may seem. These transfers over the three-year life of the e-CNY rollout are only a third of what is transferred to Alibaba and Tencent Pay – China’s two largest mobile payment processors – in a single day. “So, in comparison, it’s a very small number of transactions,” Kumar said.
Although not yet a reality, in theory it is a threat to the US dollar because other nations developing their own CBDC networks can more easily trade without it. “We are seeing this because there have been double the number of CBDC projects that were launched during this year,” Kumar said.
“Since the invasion of Ukraine, and the sanctions packages that were unveiled against Russia, countries are trying to figure out what to do if that happens to them and how to build a system against it,” Kumar added.
Financial rails, or clearing and settlement systems such as SWIFT in place today, respect sanctions imposed by NATO nations. However, as CBDCs become more widespread, nations such as Russia, North Korea or China can ignore these sanctions by using digital currencies that are not regulated by the US or its allies.
