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What’s next for China’s digital currency?

By Mike Orcutt | MIT Technology Review | August 3, 2023

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From the outside looking in, it is impossible to fully ascertain the government’s plans for the e-CNY. Though the People’s Bank of China (PBOC) has not been shy about its central bank digital currency (CBDC) project, it has revealed few specific details about how the e-CNY actually works—or how it ultimately intends to use it.

One thing we do know is that it’s been a long time in the making. While Alibaba and Tencent launched their digital payment systems in 2004 and 2005 respectively, China began researching digital currency technology in 2014 and launched a research institute devoted to the concept in 2016, hoping to create a centralized alternative. Then in 2019, after Meta (then called Facebook) proposed its own global digital currency, PBOC officials expressed concern that the coin, called Libra, might undermine the monetary sovereignty of China’s currency, the yuan. The next year it started the e-CNY pilot phase, which is still ongoing.

According to Mu Changchun, director general of the PBOC’s Digital Currency Institute, the e-CNY project has three main goals: to improve the efficiency of the central bank’s payment system, provide a backup for the retail payment system, and “enhance financial inclusion.”

China is at the forefront of an increasingly global push to adopt CBDCs. More than 100 countries around the world are exploring possible CBDC designs, and a big question they are wrestling with is how directly the central bank should be involved versus letting the currency be run by private-sector intermediaries. For example, to prevent money laundering and other financial crimes, traditional banks require users to verify their identities. Most central banks don’t want to have to do this kind of admin for millions of people.  But the PBOC’s desire to do just that explains why some civil liberties activists oppose the idea of CBDCs. Around the world, retail transactions are going cashless, and if cash becomes obsolete, governments will use CBDCs as tools for surveillance and control.

Though the government may be struggling to find compelling applications in China, it may have found one elsewhere, in the form of large cross-border payments between banks. The international payment system, which consists of a network of so-called correspondent banks, can be cumbersome and slow. CBDCs could be faster and more efficient.

For China, there could also be a geopolitical upside: an alternative set of international payment rails that the United States does not control.

3 key takeaways from the article

  1. China’s digital yuan was seemingly born out of a desire to centralize a payment system dominated by the tech companies Alibaba and Tencent. According to its central bank, the digital currency, also known as the e-CNY, is both a risk-free alternative to these commercial platforms and a replacement for physical cash, which is becoming obsolete. 
  2. Almost three years into the pilot, though, it seems the government is still struggling to find compelling applications for it, and adoption has been minimal. Now the goal may be shifting, or at least broadening. China appears to be charging ahead with plans to use the e-CNY outside its borders, for international trade. 
  3. If it’s successful, it could challenge the US dollar’s position as the world’s dominant reserve currency—and in the process shake up the global geopolitical order.  

Full Article


Topics:  Technology, Global Financial System, Digital Currency

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