Beijing is ahead in the race for establishing a global digital currency standard At the Beijing Olympics—in addition to showcasing a 60-foot snowman and an ambitious (if controversial) environmental initiative—China is debuting its newly minted central bank digital currency, or CBDC. The country had hoped to make a splash by having thousands of international visitors experience the high-tech convenience of downloading currency directly to a smartphone wallet or a dedicated card, bypassing the ATM or foreign exchange bureau. Sadly, foreign spectators will not be permitted to attend this year’s games. Still, the coming of age of the e-CNY, as the digital currency is known, is a significant development. It should also constitute a serious cause for concern among the U.S. and its allies. China has a substantial lead in developing a CBDC which has important strategic implications. The U.S. government exerts outsize influence overseas thanks in part to the U.S. . These levers enable Washington and its allies to enforce economic sanctions, fight crime, punish military adventurism, and promote ideologies such as democracy, human rights, and liberal capitalism. The Chinese government—being often on the receiving end of U.S. pressure—has sought to undermine Washington’s soft power by promoting its own currency, technological infrastructure, and technology standards. Over the past year, China has made substantial progress toward this goal by advancing and internationalizing the e-CNY. Additionally, the e-CNY will enable Beijing to embed surveillance and control mechanisms deep into the fabric of tomorrow’s economy. Having built a comprehensive system of surveillance and repression at home, China has the capacity through the e-CNY to internationally scale core elements and functions of its police state. To be sure, it is unlikely that China will succeed in quickly toppling America’s dominance over international finance. The renminbi does not even circulate internationally in a meaningful way, and China, as its steward, suffers from trust and transparency issues. Moreover, although the U.S. is behind in developing a CBDC, it is a world leader in the complex technologies needed to launch one, and it has begun researching the alternatives. Last week, the Boston Fed published its work on an open-source CBDC (“OpenCBDC”) with MIT researchers that includes “selected concepts from cryptography, distributed systems, and blockchain technology to build and test platforms that would give policymakers substantial flexibility in the potential creation of a CBDC.” Nevertheless, China’s e-CNY successes amount to a Sputnik moment for the U.S.— an alert that a formidable competitor has taken steps to weaken or even usurp a key strategic advantage. The e-CNY Comes of Age As mentioned in my previous articles on the e-CNY, the People’s Bank of China (PBOC) began researching the development of a CBDC in 2014. At the behest of President Xi Jinping, work accelerated in the second half of 2019 after Facebook announced plans to launch its own digital currency, the Libra (renamed Diem in 2020, then dismantled altogether a few weeks ago). In 2020, the PBOC launched pilot tests in four cities and expanded that to twelve locations last year. While those tests have been successful, the e-CNY is facing friction. Notably, China already has two private payment networks—Alipay and WeChat—that are widely used for everyday transactions and have more than a billion combined users. Both networks have announced that they would enable users to fund their accounts via e-CNY wallets (rather than direct links from their bank account). Yet skeptics ask, what will motivate users to do this, or to switch from the existing payment networks to using an e-CNY wallet directly? While the answer to that question may be unclear, if government statistics are accurate, China has made quick progress in proliferating the e-CNY. The PBOC released an e-CNY wallet app on smartphone stores on January 4, 2022. It became the most downloaded app on China’s Apple iOS app store on January 8, and it kept that position for five days. Within the first two weeks, 261 million users had installed the app, according to a Chinese press event, although only those in the 12 pilot locations are currently able to use the wallet. That pace of uptake stretches credibility. Research by Sensor Tower, cited by Reuters, found that the app had been downloaded To date, e-CNY transactions worth more than 87.5 billion yuan (US$13.78 billion) have been made, according to government figures. Additionally, by November, more than 10 million corporate wallets had been created, according to Mu Changchun, Director of the PBOC’s Digital Currency Institute. The e-CNY: An Enticing Export Among the locations in the pilot program, several have launched efforts to expand the e-CNY abroad. The Qianhai district, adjacent to Hong Kong, about US$1.5 million each year to motivate enterprises to develop cross-border uses of the e-CNY and to support e-CNY research. The Guangxi autonomous region and Hainan province are planning similar promotions. Numerous senior Chinese officials—including business leaders, PBOC representatives, academics, and researchers—have publicly hailed the advancement and internationalization of the e-CNY. In October, Li Lihui, head of the Blockchain Research Working Group at the National Internet Finance Association of China and former president of the Bank of China, said, “China's central bank digital currency experiments lead the world and should strive for a dominant position in the process of globalizing the central bank digital currency.” As his priorities, Lihui mentioned using the digital currency to clear international financial institutions’ payments, building a digital international financial center, and creating a digital international wealth center. Far from the Olympics or the flurry of domestic activity surrounding the newly minted e-CNY app, perhaps the most worrying development has been an initiative that would enable China to trade the e-CNY directly with other countries, a project known as the Multiple Central Bank Digital Currency Bridge, or mBridge for short. China joined the initiative last year, in partnership with Hong Kong, Thailand, the United Arab Emirates, and the Bank for International Settlements’ Innovation Hub (BISIH). The mBridge, which is in a pilot phase, promises various benefits that appeal to businesses and governments.
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