China was the first major economy to pilot a sovereign digital currency, also known as a CBDC (central bank digital currency).

In fact, it is the only country that has continuously made strides with its new electronic payment system while the rest of the world is still in the research phase. That said, after having run numerous trials over the last two years for its digital yuan, the People’s Bank of China is now aiming for a wider reach by launching an e-CNY wallet app in the country.

To recall, over the past two years, cities throughout China have even been holding lotteries, distributing a total of 10 million digital yuan (worth about US$1.47 million at the time) to people in Shenzhen in October 2020, 20 million digital yuan (or US$3 million) in Suzhou in December 2020, and 40.2 million digital yuan (or US$6.2 million) in Chengdu in February 2021.

For context, e-CNY is essentially physical cash converted into a digital form, and it’s been in the works since 2014.

Distribution of the digital currency takes place using a two-tier system that transfers e-CNY from the PBOC to commercial banks. Banks will then distribute the currency directly to consumers.

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In November last year, PBOC’s Governor Yi Gang had said that China would continue to advance the development of its central bank digital currency and improve its design and usage, including increasing its interoperability with existing payment tools.

As of November 2021, the central banks said around 140 million Chinese citizens have opened digital yuan wallets.

As per the Reuters report, a notice in the app said it is in a research and development pilot phase and is only available to selected users through supported institutions that provide e-CNY services, including major domestic banks.

That said, the new e-CNY app is accessible on both China’s Android and Apple app stores since Tuesday, but only to people in 10 specific cities, including Beijing, Shenzhen, Chengdu, and Shanghai.

Test run at the Winter Olympics for China’s digital yuan

So far, Beijing seems to be focusing on ensuring the release and use of the digital yuan at the Beijing Winter Olympics in February this year — the first chance for the outside world to have a glimpse of the virtual currency.

Foreign visitors will be able to use the digital yuan to pay for things like accommodation and transportation within major venues at the Games, according to the government. 

There will also be ATM machines throughout the Games that can convert foreign currencies, including US dollars, into virtual Chinese money, which will be carried in a digital yuan card.

The Chinese government even urged American companies, including McDonald’s, to accept digital yuan before the 2022 Olympics. 

In fact, according to the Financial Times, the fast-food giant has been forced to expand the digital yuan trial to more of its restaurants in the nation in anticipation of the Winter 2022 Beijing Olympics.

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According to deputy central bank director Kasidit Tansanguan, the pilot project was originally planned for Q2 of 2022 and seeks to test the use of the CBDC in cash-like activities, albeit within a limited scale. 

Said ‘cash-like’ activities include transactions such as deposits, withdrawals, and fund transfers by around 10,000 customers as well as financial institutions. 

According to Kasidit, Thailand will “proceed slowly” after discussions with relevant parties and “careful consideration”.

“Thailand can still take a gradual step in the retail CBDC to ensure efficiency and prudence as it does have a problem with fund transfers or payments as some other countries,” added Kasidit, in a Reuters report.

Thailand began work on a CBDC from as early as 2018, starting with Project Inthanon.

From 2018 to 2020, BoT had been in collaboration with leading financial institutions, to create a proof-of-concept wholesale Central Bank Digital Currency (CBDC) prototype using distributed ledger technology in different use cases. It ranges from enabling automated regulatory compliance processes to tackling high fees in cross-border payments.

Not a CBDC vs crypto thing

Earlier this month, the country’s central bank said it does not want commercial banks to be directly involved in trading digital assets, citing the risks stemming from high price volatility, reported Reuters.

This came on the back of recent movements by commercial banks in the country that has invested in local digital asset exchanges. First was the US$537 million acquisition of Bitkub by Siam Commercial Bank Pcl (SCB), and then a US$41 million investment into Zipmex by Bank of Ayudhya Pcl .

“We don’t want banks to be directly involved in digital asset trading because banks are (responsible) for customer deposits and the public and there is a risk,” said Bank of Thailand (BOT) senior director Chayawadee Chai-Anant.

“The priority should be on technology that promotes financial innovation, enhances the efficiency and security of the payments system, and safeguards the economic and financial systems,” he added.

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Prior to that, the central bank also warned companies about accepting crypto payments. 

“If other currencies are widely used, it will impact the central bank’s ability to oversee the economy,” said BOT senior director Sakkapop Panyanukul.

He added that the bank is not exactly entirely afraid of all cryptocurrencies — just the ones that aren’t backed by assets, such as bitcoin.

Cryptocurrencies that are backed by assets are known as stablecoins. 

The central bank also added that it was working with other agencies on ways to regulate digital assets.

Early last month too, the Tourism Authority of Thailand was reportedly working on its own digital token, the TAT Coin, which will be accepted for travel.

A new unit will also be set up by next year to handle the issuance of Thailand’s own CBDC, produce a wallet, and build a new tourism ecosystem. The Tourism Authority’s governor believes that Thailand must be promoted as a crypto-positive society to welcome crypto millionaire tourists.

Trading and use of cryptocurrencies have gained momentum in Thailand in the last year with retailers and real estate developers accepting digital assets as payments.

Thailand, which has eight licensed cryptocurrency exchanges, saw about 205 billion baht ($6.09 billion) in digital asset transactions in November, data from the Securities and Exchange Commission showed.

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Digital currencies are becoming increasingly sought after by governments and stablecoin is one way of doing it. Pegged to a market value, a stablecoin is like cryptocurrency. And one country that is hoping to create the world’s first government-issued national stablecoin is the Republic of Palau.

An archipelago of islands in Oceania, Palau has partnered Ripple to explore the national digital currency and its use cases with the XRP Ledger. The partnership will initially focus on developing strategies for cross-border payments and a USD-backed digital currency for Palau.

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This could see the implementation of the world’s first government-backed national stablecoin in the first half of 2022 for which Ripple would provide Palau with technical, business, design, and policy support. Meanwhile, exploring a USD-backed stablecoin and associated use cases—such as a corporate registry—on the XRP Ledger could provide a viable alternative to central bank digital currencies (CBDCs) for countries like Palau.

“As part of our commitment to lead in financial innovation and technologies, we are delighted to partner with Ripple,” said President Surangel S. Whipps, Jr. “The first phase of the partnership will focus on a cross-border payments strategy and exploring options to create a national digital currency, providing the citizens of Palau with greater financial access.”

Palau understands the potential for financial technologies, including blockchain, to transform its economy and position the country as a highly desirable country to do business with. The same technologies will also transform how its citizens access financial services and enable efficient cross-border remittances.

The XRP Ledger provides financial institutions and government bodies such as Palau the ability to fully settle transactions for fractions of a penny and in just 3-5 seconds. To date, more than 5,400 currencies have been issued and traded on the XRP Ledger via its integrated decentralized exchange (DEX) and custom token functionality that makes it easy to create, issue, and manage any asset—including stablecoins.

“We are excited to be working with Palau to achieve its financial and climate-related goals,” said James Wallis, VP of Central Bank Engagements at Ripple. “We have a wonderful opportunity to bring together our technology and experience with the unique characteristics of Palau to make a real economic and social impact for the country.”

As an established leader in the global climate debate, Palau chose Ripple because of its extensive experience in blockchain and building global payment systems, and the XRP Ledger because it’s carbon-neutral and 120,000x more energy-efficient than proof-of-work blockchains. What’s more, the XRPL provides significant benefits such as scalability, speed, and low cost.

Palau is just one of the many countries that are looking to leverage the benefits of cryptocurrencies. Earlier this year, El Salvador became the first country in the world to accept bitcoin as a legal tender. The country also just announced that it plans to construct a “Bitcoin City” near a volcano that will be funded by the cryptocurrency.

Nigeria became the first African country to roll out a national digital currency several weeks earlier while the Bahamas released the Sand Dollar in October 2020. Japan also recently announced plans for a new digital currency backed by bank deposits. The effort will involve the nation’s top banks and about 70 other companies and organizations.

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These finalists, which include financial institutions, fintech players, and technology solution providers, have been selected from over 300 submissions across 50 countries to move on to the next part of the challenge, an eight-week Acceleration Phase.

The event then culminates in the finalists pitching their solutions to a panel of judges and an international audience at the Singapore FinTech Festival 2021, slated for early November, where the top three will win SG$50,000 each.

However, all 15 finalists will see their applications for grant funding of up to SG$200,000 fast-tracked, with the funding support coming from the MAS Financial Sector Technology and Innovation (FSTI) Proof-of-Concept Scheme.

Over the course of the eight-week acceleration phase, the finalists will be given access to the API Exchange (APIX) Digital Currency Sandbox to prototype their CBDC solutions, while attending masterclasses and networking sessions with industry experts, where topics crucial to the development of a retail CBDC will be covered.

The challenge had invited participants to address 12 problem statements related to CBDC instruments, distribution, and infrastructure, which covered issues like inclusivity, interoperability, and programmability.

The proposals submitted by the finalists looked towards addressing multiple problem statements, through a variety of technological approaches. According to MAS said approaches include hardware wallets, digital identity, and asset tokenization solutions.

“The Global CBDC Challenge aims to discover and develop retail CBDC solutions that will benefit the global community. We are encouraged by the strong interest from established financial institutions and emerging FinTechs alike,” said Sopnendu Mohanty, Chief FinTech Officer of MAS. 

He was also impressed by the quality of the proposals received, and with the diversity of solution approaches across the problem statement categories.

The finalists are as follows:

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Earlier in April this year, the Bank of Japan (BOJ) launched the first phase of its central bank digital currency (CBDC) experiment, with plans to launch the second phase next year. The BOJ is among a group of seven major central banks jointly looking into core features of CBDCs.

Digitalization driving CBDC interest in Asia

The second phase will further clarify some key functions of a digital yen, including which entities will serve as intermediaries between the BOJ and deposit holders.

Japan is joining the ranks of other Asian countries that have studied or are near the launch of their own sovereign digital currencies, including China, Malaysia, and Cambodia. This trend is in line with the rapid pace of digitalization that’s taking the world by storm.

“By around the end of next year, we’ll have a clearer view of what Japan’s CBDC would look like,” Hideki Murai, who heads the ruling Liberal Democratic Party’s panel on digital currencies, told Reuters in an interview on Friday.

However, Japan has not made any decision right now on whether the CBDC will be issued or not. The nation is still researching details of its design and how its issuance will affect financial institutions, according to Murai.

CBDC from Japan not confirmed

Japan’s progress towards experimenting with its sovereign digital currency will be putting quite a number of players in the finance ecosystem on their toes, and ramp up the discomfort traditional lenders will have against digital players.

Similar to other countries, Japan’s traditional banking and finance sector is seeing an upheaval from digitalization, as well as changing consumer demands for financial services. Fintech companies, some independent and many backed by consortiums, usually tech giants, are increasingly entering the lucrative financial space. 

Earlier, the BOJ argued that a digital yen will “not crowd out or meddle in private businesses”. If the CBDC is designed in a way that puts commercial banks as intermediaries, it could reduce business from alternative digital financial providers.

“If a digital yuan becomes so convenient it’s frequently used by tourists or becomes a main settlement means for trade, the relationship between the yen and yuan could change” and erode the yen’s status as a safe-haven currency, Murai said.

International compatibility also a focus

Murai added that the BOJ has to ensure that their CBDC is compatible with designs by other nations, in part to counter China’s advanced progress towards their Digital Yuan. 

This sentiment commensurates with recent research by the Bank of International Settlements (BIS), which highlighted the importance of international cooperation on designs. 

Such cooperation will be vital if central banks are to harness the full benefits of CBDCs, especially as it will be able to improve cross-border payments while countering foreign currency substitution, said BIS. 

In essence, the report suggested that CBDC designs be centered around digital identity (DI) and privacy and security. 

However, a key challenge highlighted was a lack of interoperability of digital identities (DI) across countries. Some countries may be hesitant to provide DI information to other countries that do not have similarly stringent or different data protection regulations.

Nevertheless, we will have to wait till late 2022 to see how Japan’s aspirations towards a CBDC will pan out adequately, and how CBDCs in nearby regions will be able to complement each other.

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Monetary systems are fundamentally built on trust in the currency. As such, it opined that CBDCs can open a new monetary channel based on trust in central banks. 

Given how the world is rapidly digitalizing with rising consumer trends towards digital forms of payments, a digital representation of money such as CBDCs can “better capture public interest”. 

“… digital innovation implies a “triple imperative” for the central bank in its role at the foundation of the monetary system: competition, data privacy and the integrity of the payment system,” said Hyun Song Shin, Economic Adviser and Head of Research of the BIS, in a speech at their recent Annual General Meeting in Basel.

It recommended that CBDCs function as part of a “two-tier system” where the central bank collaborates with the private sector, with each playing to its own strengths. The central bank will operate the “core of the (CBDC) system”, and ensure its safety and efficiency, whilst private sector players such as banks and other payment service providers bear the brunt of customer-facing activities. In Asia, several countries have or are considering developing CBDCs, including China, Japan, Malaysia, and Cambodia.

CBDCs should be designed around digital identity

Reinforcing its disdain for decentralized cryptocurrencies, BIS pushed for CBDC designs to be built around digital identity with a focus on data security and privacy. A trusted digital identity approach can stave off illicit activity, while at the same time, protect data privacy and facilitate cross-border payments. 

“Central bank digital currencies are moving from concept to practical design and renew the institution of money in a new form designed for the digital age,” writes the Bank for International Settlements in its Annual Economic Report 2021.

The report covered several design options for CBDCs and included an economic analysis of its implications for financial institutions, central banks, and customers.

As central banks are trusted and function as overseers of each nation’s monetary system, CBDCs will merely have to piggyback on their status to ensure the finality and certainty of payments made in transactions. 

Central banks ensure adequate liquidity in payment systems to function and are able to level the playing field; as such, CBDCs can be “made available on an equal basis to all parties”.

BIS, in its analyses, suggests that the most viable and practical design for CBDCs would entail one that is tied to digital identity. 

This means that users would have to identify themselves to use this currency system, which reduces the option for using a decentralized identity approach such as blockchain. 

They did, however, talk about possible designs that borrow from distributed ledger technology (DLT) in the form of “permissioned DLTs”.

However, this is still an ongoing area of research that is assessing the merits of such a design. 

CBDCs require high data security and protection

BIS noted the importance of data security and protection of customers’ data, and frequently emphasized their necessity in CBDC designs. Exploring various digital identity (DI) management approaches, BIS referenced DIs from Big Tech such as Facebook and Huawei. Such players often build private DI ecosystems within their products and services, which can also be used across other services with facilities such as single-sign-on (SSOs). They also mentioned harmonized DIs that work across consortiums of private firms (e.g. multiple banks) but highlighted how this approach would lead to silos and limited interoperability with other services. And there’s also a hybrid approach where private and governmental operators could harmonize and provide interoperability for DIs such as those seen in Estonia and Singapore. 

The Singapore government utilizes a biometric digital national identity system for citizens called SingPass, which is required to access government services, but which can also be used to access services by certain private players. As BIS condones CBDCs, they emphasized how CBDCs should also come with a high standard of cybersecurity, especially since the pandemic has led to a rise in cybercriminal activity and attacks. Incidents such as data breaches and coordinated or state-backed cyberattacks further reinforce the critical need for higher security as CBDCs will similarly face cyber threats.

BIS concluded that CBDC designs ought to be careful to protect users against personal data abuse whilst at the same time protecting the sovereign payment system against money laundering and financial crime.

Facilitating cross border financial activities

In addition, the BIS says international cooperation on design will be vital if central banks are to harness the full benefits of CBDCs and to improve cross-border payments while countering foreign currency substitution. Cross-border trade is big in Southeast Asia (SEA), and the rise of digitalization and consumers hungry for e-commerce will further spur more cross-border trade.

Recently, China’s JD.com launched the first ‘In-ASEAN’ cross-border trade with Thailand, and Malaysia and Thailand also launched a cross-border QR code payment system. These suggest that the necessity for an interoperable payment system is all the more important, especially in this region.

A key challenge highlighted by BIS is the lack of interoperability of DIs across countries. Some countries may be hesitant to provide DI information to other countries that do not have similarly stringent or different data protection regulations.

As such, it recommends that countries collaborate to develop a mutually recognizable system for DI credentials. This can be grounded on fostering KYC (know-your-customer)  and cross-border information sharing; reviewing interaction between data frameworks and cross-border payments, and “factoring an international dimension into CBDC design.”

BIS asserts that such cooperative efforts can lead to robust payment arrangements. It highlighted the multi-CBDC (mCBDC) approach that links CBDCs so they interoperate across borders. This can be done by coordinating national CBDC designs with “consistent access frameworks and interlinkages to make cross-currency and cross-border payments more efficient”. 

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The world’s central banks are slowly beginning to acknowledge the impact that digital payments are having on the financial system and economy. Interest intensified when China launched its own Digital Yuan. Countries then began actively experimenting with the opportunities presented by exploring their own central bank digital currency (CBDC) but not all preferred China’s retail approach to it. In Southeast Asia, Malaysia’s Central Bank signaled it would rather run a pilot project to gauge the merits of a CBDC instead of focusing on a retail CBDC similar to China’s digital yuan or Sweden’s e-krona.

Bank Negara Malaysia (BNM) Director of Financial Development and Innovation, Suhaimi Ali, said during a Fintech Fireside Asia session that “Malaysia’s central bank will be running a proof-of-concept (PoC) project to gauge the merits of a central bank digital currency (CBDC) with an initial focus on wholesale CBDCs.”

He revealed that at the initial stage, BNM is unlikely to focus on a retail CBDC. “We acknowledge that the CBDC landscape is evolving very rapidly, particularly over the past year due to the rapidly evolving digital assets and payment space which has prompted central banks globally,” Suhaimi said.

An analysis by PWC earlier this year showed that in Asia, Malaysia is behind its neighbors in the CBDC arena, especially compared to nations such as Cambodia, Thailand, mainland China, Hong Kong, and Singapore, which have emerged as being amongst the most mature CBDC projects to date. Another separate report by Bank for International Settlements (BIS) released in January 2021 found that about 60% of central banks are conducting experiments or PoC projects, up from 42% in 2019, while another 14% are moving forward to development and pilot stages.

BNM has not shared any timeframe on its own CBDC. In its Annual Report 2020 however, the institution said it does not have any immediate plans to issue a digital currency. “Moreover, domestic payment systems, including the real-time retail payments platform (RPP) also continue to operate safely and efficiently to support the needs of the economy and allow real-time digital payments,” it said.

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The central bank will also actively assess the potential value proposition of CBDCs in light of developments in the digital assets and payments space. “We will also actively monitor the trend of key indicators with direct impact to our mandates, which may provide useful data points for us to evaluate the merits of CBDC issuance. These include, among others, the level of physical cash usage in Malaysia, the extent to which privately-issued digital assets are used for payments in Malaysia, and the extent to which CBDC is being used to facilitate cross-border trade,” it said.

CBDC issuance, BNM said, should complement existing payment instruments including physical cash to ensure that all Malaysians, in particular the underserved communities, have continued access to safe and efficient payment solutions. 

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China’s development of a sovereign digital currency is not new, as it has been in the works since 2014. The state’s latest trial in Beijing targets 200,000 users and is part of its series of real-world trials of the ambitious project. Previous ‘beta’ trials were limited to pockets of users, including those working in state-owned banks and civil servants.

Similar to its previous city trials, Beijing users would have to apply for a lottery ticket through their app by 7 June, for a chance to win 200 RMB (US$ 29.50). Winners will have until 20 June to use their prizes, reports Channel News Asia.

Chinese digital currency and its rapid growth

Named ‘Digital Currency Electronic Payment’, the digital currency has been largely successful in its trials in the cities of Suzhou, Shenzhen, Chengdu, and Xiongan, with plans to introduce it at the 2022 Beijing Winter Olympics.

China is poised to become the world’s most powerful economy to hold a national digital currency if its project is successful nationwide. As it is, two of the nation’s digital giants have already pledged to support the rollout of the project. Additionally, large retail companies such as JD.com have accepted the currency, with many smaller merchants following suit.

The allure of centralized digital currencies

According to a Bank for International Settlements survey, 80% of banks globally are keen on exploring central bank digital currencies (CBDC). The International Monetary Fund (IMF) believes CBDCs can lay the groundwork for highly efficient payment systems, ones that promote financial inclusion.

Additionally, it can motivate a shared ecosystem between the general public, corporations, and the financial industry at large to develop parallel innovations that will also leverage blockchain technology in new, non-payment-related areas.

The threat of cryptocurrencies

Cryptocurrencies such as Bitcoin and Ethereum, with their inherent decentralized nature, appeal greatly to consumer markets at large, including the unbanked – which banks have historically had trouble courting. The biggest threat, however, remains in how the technology can usurp the hold central banks have had on the flow of funds, which can render many of their legacy services obsolete. 

Governments across the world too, are carefully watching the movement of cryptocurrencies. A number plan to, or have introduced regulations on trading activities, including those in the APAC region. Some, like China, have taken extreme steps like completely banning crypto activity. 

With financial giants such as Goldman Sachs supporting cryptocurrencies, banks are all the more incentivized to develop alternative products to retain their power within the financial sector.

Chinese Digital Currency and its APAC impact

If anyone can successfully launch a digital currency, at scale, it is China. And its efforts as the adoption leader in APAC have in part, inspired governments of these emerging markets to jump on the digital currency bandwagon too. 

Japan is carefully studying its viability, with plans to pilot a digital yen of its own in 2022. And in developing nations such as Cambodia, a digital currency proffers potential independence from its decades-long reliance on the US dollar, thus facilitating increased adoption of its native currency. 

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The Bank of Thailand and the Hong Kong Monetary Authority (HKMA) both saw the successful trialing of a distributed ledger technology (DLT) for cross-border fund transfers, under Project InthanonLionRock. Multiple countries in APAC are also exploring the development and experimentation of national digital currencies, including India, Indonesia, Vietnam, the Philippines, and Korea. 

Aside from trials of its national digital currency, China is also working with the Central Bank of the United Arab Emirates to develop a cross-border payments project based on DLT. Dubbed ‘m-CBDC Bridge’, the project aims to study the viability of using DLT to enhance the financial infrastructure for cross-border payments, hence benefitting more central banks in Asia and other regions.

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Observers following the story might have assumed that China’s experimental digital yuan is designed to replace the US dollar’s global dominance. Former governor of the People’s Bank of China, Xiaochuan Zhou, cleared the air on potential misunderstandings regarding the country’s push for its digital sovereign currency.  He clarified that currency internationalization depends more on the opening up of financial policies and reform of the financial system, rather than on technology.

In short, China has never intended to replace the US dollar as the preferred international payment currency. Instead, the development of a digital yuan may help facilitate its usage in cross-border payments. “Also, the digital currency electronic payment system has been jointly developed by commercial banks, telecoms companies, and several major third-party payment companies, and is not meant to fulfill the role played by third-party payments. We are in the same boat,” Zhou said.

According to a report by the Global Times,  Zhou said in a keynote speech at the Tsinghua PBCSF Global Finance Forum in Beijing that media reports on the digital yuan, known as e-CNY or Digital Currency Electronic Payment (DCEP), especially in foreign media coverage, tend to give rise to some misguided understandings.

To date, China appears to be at the forefront as the first major central bank to issue a digital version of its currency, seeking to keep up with – and maintain control of – a rapidly digitizing economy. Trials and tests are underway in several cities, including Hong Kong, which is in talks with China to expand cross-border testing of the digital yuan.

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Zhou said the DCEP project, primarily built on modernizing the domestic payment system, envisions raising efficiency and reducing costs, and serving as a bridge to retail payments in particular. To a certain extent, efforts to modernize and digitize the yuan’s payment system would help in increasing the yuan’s status as an international curency. 

However, Zhou clarified that the yuan’s internationalization is contingent upon the country’s institutional and policy choices, along with its reform and opening-up progress. In fact, China’s decision will not push the US Federal Reserve to rush its own digital currency project, its chairman Jerome Powell emphasized recently. 

Global competition is underway over the last few years to define the future of money. The aim is to address the flaws of currency’s traditional forms. Physical cash is a nuisance for transactions at a distance, and bank deposits are vulnerable to crises. To that end, many nation-states are now exploring the central bank digital currency option. 

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In the quest for a digital currency, China appears to be the first out of the gate. The People’s Bank of China (PBOC) has become the first major central bank to launch large-scale trial runs of its digital currency. Yet, China’s decision will not push the US Federal Reserve to rush its own digital currency project, its chairman Jerome Powell emphasized recently.

To top it off, the Federal Reserve believes China’s approach would not work in the US. Following the Fed’s latest policy meeting, Powell highlighted that the Fed’s primary goal is not to speed to market, but rather to avoid any calamitous misstep in executing digitalization of the US dollar – the world’s dominant reserve currency.

“It is far more important to get it right than it is to do it fast. The currency that is being used in China is not one that would work here. It’s one that really allows the government to see every payment for which it is used in real-time,” Powell stated. He added that the US central bank is taking its time to understand the capabilities that are possible with digital currencies. That includes making sure the technology is being used in a way that makes sense for the country and the people who rely on the dollar as the world’s reserve currency, he said.

Powell also acknowledged that central bank digital currencies are now possible but they would need to understand whether that is something that would be a good thing for the people that they serve. He previously made it clear that the Fed cannot move forward on developing a digital currency without congressional action. 

For now, the Boston regional arm of the Fed is researching what a central bank digital currency would look like in a joint program with the Digital Currency Initiative at the Massachusetts Institute of Technology. The research is expected to last two or three years and then a separate policy process would be required before the Fed can create a central bank digital currency of its own.

China on the other hand is already running pilot programs to test out digital yuan which made analysts wonder if the faster pace from the globe’s second-largest economy could lead the yuan to gain dominance over the dollar. According to the International Monetary Fund, The dollar accounted for nearly 60% of the world’s official foreign exchange reserves at the end of 2020, while China’s share is just 2.25%

Will China’s digital yuan challenge the dollar’s hegemony?

To begin with, why would Beijing wish to add yet another payment system, DCEP, when the country is already hurtling towards a near-total cashless society? The answer goes to the core of President Xi Jinping’s autocratic government. Unlike other e-payment systems, DCEP will be centralized and state-run. Beijing will be able to monitor how money is spent in real-time and have the same controls over DCEP as with the yuan. 

There will be no third party involved — the PBOC issues the e-yuan, the central bank’s digital currency, directly into a digital wallet and its status as legal tender is guaranteed by the Chinese state. That said, a cheaper and faster payment system – which could also avoid US sanctions – would be viewed as a challenge to the dollar’s dominance.

With over 90% of international transactions presently conducted in US dollars, Beijing hopes the digital yuan will allow it to bypass the all-mighty greenback. That sentiment was echoed by Daryl Guppy in an op-ed for Chinese state-media outlet CGTN, highlighting that “a sovereign digital currency provides a functional alternative to the dollar settlement system and blunts the impact of any sanctions or threats of exclusion both at a country and company level.”

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Simply put, with China’s new digital yuan, international trade can be done in its own currency, the Renminbi. Essentially, instead of the value of transactions being hedged in US dollars, they can utilize a blockchain escrow in Renminbi, and the transaction doesn’t require US facilitation or any external entanglements. Currently, there are many ways China is attempting to take the digital yuan to the world. One is using homegrown startups like Didi, which has already penetrated Latin America with its ride-hailing model and has announced plans to enter the European market – where it could begin offering future rides to be paid in digital yuan.

Another way is through trade, analysts reckon. Indeed, China’s Belt and Road initiative (BRI) is a ripe entry point for the digital yuan’s internationalization. The government could ask BRI-participating countries to start accepting the digital yuan, make loan payments and pay to install infrastructures such as point-of-sale terminals and lower transaction fees.

Last August, China waived transaction fees between the yuan and twelve other currencies, including the Singaporean dollar, Korean won, Thai baht, and Russian ruble. According to China’s State Administration of Foreign Exchange, the decision was taken to “actively cooperate with the national belt and road development strategy.”

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