The competition to launch CBDCs has picked up pace, with China upping the ante on testing of its digital yuan. The PBOC revealed this week that the e-CNY, the official name for the digital yuan, will be accepted in all the major cities in the country, thus expanding the world’s largest CBDC project.
The new launch follows several years of testing the digital yuan in a handful of regions, and marks a major shift towards the implementation of the digital currency across the country. PBOC officials estimated that more than 200 million people are using the technology and 5 million companies are operating WeChat payment. It is said that, as of now, there are already 6 million merchant accounts on the e-CNY platform and the transaction volume has surpassed 100 billion yuan or around $15 billion in the last one month.
”The digital yuan is an important part of China’s efforts to enhance its financial sector and stay ahead of the curve in the global economy,” Li Wei, head of the PBOC’s digital currency research institute, said in a press conference to reveal the expansion. ”We are sure that the e-CNY will contribute to the further advancement of financial inclusiveness, increasing the efficiency of payment transactions, and the development of digital economy.
It has generated a lot of interest in the international financial markets, with many people considering it as an assault on the dollar as the world’s reserve currency. Others have pointed out that the digital yuan’s implementation can lead to the speeding up of the de-dollarization process and alter the current global financial system.
As a result of China’s advancements, many other central banks of the world have stepped up their CBDC launches. The ECB has recently moved to the second phase of its digital euro experiment with the aim of solving the most important questions concerning design and distribution. The head of the ECB Christine Lagarde stressed that a CBDC should not only be a tool for innovation, however, it is also essential to take into account the problem of privacy and stability.
”We cannot allow ourselves to be left out of the digital currency revolution,” said Lagarde during a fintech conference held in Frankfurt. It will act as a digital form of cash and will not replace cash and will provide European citizens with a safe and convenient way of making payments in the digital world using the euro.
At the same time, the Federal Reserve of the United States has been a bit more reserved in its actions and has not yet embarked on a full-scale CBDC project while continuing the research of a digital dollar. The US Federal Reserve Governor, Jerome Powell, has often called for a proper study and discussion on the matter before any action can be taken on the possible issue of a U. S. CBDC.
”We want to be correct rather than be the first,” Powell said before the committee of Congress last month. The positive and negative impacts of a digital dollar should be considered and it is crucial to establish that any CBDC that we create is consistent with our policies and principles.
Still, the pressure is increasing for the U. S. to do more, and the Fed’s approach appears somewhat more cautious. A recent piece of legislation has been proposed by a number of members of Congress from both sides of the political divide to fast track the creation of a digital dollar stating that the US cannot afford to Lag behind in the development of digital currencies especially the Chinese digital yuan.
The CBDC race has also brought discussions on whether these currencies will affect other forms of digital currencies such as Bitcoin and Ethereum. On one hand, proponents of CBDCs think that they might lower the interest in decentralized digital assets, on the other hand, there are those who think that the emphasis on digital currencies will only contribute to the development of the entire crypto market.
”CBDCs and cryptocurrencies are not mutually exclusive and they can coexist in the system as well as even synergise,” said Dr. Eswar Prasad, professor of economics at Cornell University and author of “The Future of Money. ” “It is possible for CBDCs to capture some of the use cases that are currently being met by cryptocurrencies but it is unlikely that CBDCs will be able to replicate all the features and functions of cryptocurrencies in full. ”
With more countries now engaging in the development of CBDC, issues to do with compatibility and cross border transactions have emerged. The Basel based Bank for International Settlements (BIS) has been in the front line in the research on the possibilities of implementing multiple CBDCs that will allow for efficient cross border payments through various central bank digital currencies.
The BIS, together with the central banks of Hong Kong, Thailand, the United Arab Emirates, and China, has recently finished the pilot of its mBridge project showing the possibility of using CBDCs in cross-border payments. The trial achieved a significant improvement in transaction times and costs than that of the conventional correspondent banking systems.
”The mBridge project is a leap forward in the use of CBDCs in cross-border payments,” said Benoît Cœuré, the head of the BIS Innovation Hub. This comes at a time when more countries are coming up with their own digital currencies; hence, there is the need to promote international relations in order to maintain the stability of the international financial system.
It has also brought concerns on privacy, surveillance, and the possibility of more governments’ control over the financial transactions through the CBDC projects underway globally. Civil liberty organisations and privacy experts have argued that strong measures should be devised to ensure that CBDCs do not compromise the privacy of their users or give rise to misuse.
This is because the CBDC is emerging as one of the most powerful tools that the central banks can leverage to influence the future of money and financial systems. The future several months and years will define how these new forms of money are going to be integrated and how they will affect the existing financial systems, geopolitics, and people’s financial liberties.
As China successfully introduces its digital yuan and other world countries follow the innovation, the world is on the verge of a revolution in the financial system. It is, therefore, important to note that the result of this digital currency revolution will most probably have significant implications on governments, businesses, and people across the globe as we move to the next phase of monetary policy and financial innovations.