China's Digital Yuan project, a blockchain-based cryptocurrency for consumer and trade finance, can no longer be considered a pilot project. This is the evaluation of experts in economics and cryptocurrencies.
These experts have been following efforts in China and other countries to develop and pilot Central Bank Digital Currencies (CBDCs) with the goal of establishing a blockchain-based virtual currency that is cheaper to use and faster to exchange, both domestically and internationally. 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 totaling more than 100 million yuan, or €000 billion. The country has distributed literally millions of dollars in digital yuan through lotteries, and its central bank has also been involved in cross-border trade with various countries.
If e-CNY continues to be adopted and becomes the de facto standard for international retail and business payments, the privacy of those who use the digital currency, as well as the days of the US dollar as the world's reserve currency, could be threatened.
Whichever nation finds an internationally accepted financial transaction network for digital money will be the one to set the standards around it, "and then everyone else has to follow," said former Ameritrade CTO Lou Steinberg, and a managing partner at cybersecurity research firm CTM. . Knowledge. "These standards will be designed with what their developer wants to achieve. Monitoring could be built in.
"China wants digital money because it's another tool to monitor citizen 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. There is a similar concern about government surveillance in the United States, although the motives for surveillance may differ from those of an authoritarian state.
The United States has been considering creating a digital representation of the dollar for almost three years. In March, President Joseph R. Biden Jr. issued an executive order that, among other things, called for greater urgency in the research and development of a US CBDC, "if the issuance is deemed to be in the interest national".
In November, the Federal Reserve Bank of New York began developing a prototype wholesale CDBC. Dubbed Project Cedar, the CBDC program has developed 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 around distributed ledger interoperability.
“I don't think we're treating this as a Moonshot,” Steinberg said. "The Fed is not saying it's the future, whether we like it or not, and we have a say in how it plays out, so it becomes the most important thing we do."
The blockchain technology that underpins digital cash projects is the same as that 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, wholesale cross-border payments are transactions between central banks, private sector banks and businesses. Cross-border cash transactions (or spot payments) are among the most common wholesale payments, as they are often needed to support larger transactions, such as international trade or investment in foreign assets.
Although the United States has made progress towards establishing a CBDC, it is still far behind other countries.
For example, Dunbar Project brings together the Reserve Bank of Australia, Bank Negara Malaysia, the Monetary Authority of Singapore and the Reserve Bank of South Africa with the Bank for International Settlements (BIS) Innovation Center to test the use of CBDCs for international payments .
“We are looking at 13 wholesale projects underway with different arrangements between countries,” said Christian Catalini, founder of the Massachusetts Institute of Technology (MIT) Cryptoeconomics Laboratory. “The United States is clearly behind. This is partly because there is no consensus that a CBDC is necessary or useful. There is only one nation that is clearly leading the effort in terms of both the breadth of its experience and its progress to date, and that is China.
e-CNY explained
E-CNY is a digitized version of China's money and currencies and, like other CBDCs, it was implemented on a blockchain distributed ledger, an online distributed database that tracks transactions. This database uses encryption to ensure that cash and coins exchanged online are tamper-proof, meaning that only users with access to specific public-private keys can participate in the transaction. Specifically, for retail, this could be seen as a QR code on a smartphone used to make a purchase in a store. Or it could be a company that transmits a public key code that enables a specific monetary exchange.
In 2020, the Atlantic Council, a Washington DC-based think tank, began tracking 35 CBDC projects. Today, it monitors 114 CBDC projects around the world, measuring their progress in four stages: research, development, pilot, and launch. China's e-CNY currency has been in a pilot phase since 2020, when it announced the digital currency at the Beijing Olympics. (China has been exploring creating a digital currency since 2014.)
The Atlantic Council
The greener the regions, the more advanced the CBDC projects.
“In the space of two years, the world's major central banks have gone from skeptical to serious about a digital currency form of governance,” the Atlantic Council said last month.
Ananya Kumar, deputy director of digital currencies at the Atlantic Council Geoeconomics Center, said the Asian region in general and countries like China, Thailand and the United Arab Emirates have the most advanced CBDC projects.
For the US to develop and pilot its own retail CBDC, which could be used by consumers, would require congressional action authorizing the Federal Reserve to go ahead, "and we're a long way from that," he said. Kumar.
While China's e-CNY project may no longer be a pilot project, the billion yuan transferred via its blockchain ledger isn't as monumental as it sounds. These transfers over the three-year lifespan of e-CNY's launch are only a third of the transfers through Alibaba and Tencent Pay, China's two largest mobile payment processors, in a single day. "So, comparatively, it's a very small number of transactions," Kumar said.
Although not yet a reality, theoretically there is a threat to the US dollar as other countries developing their own CBDC networks could more easily transact without it. “We see it because the number of wholesale CBDC projects launched this year has doubled,” Kumar said.
“Since the invasion of Ukraine and the revealed sanctions plans against Russia, countries have been trying to figure out what to do if it happens to them and how to build a system against it,” Kumar added.
Financial rails, or clearing and settlement systems like SWIFT that exist today, respect the sanctions imposed by NATO countries. But as CBDCs become more widely adopted, countries like Russia, North Korea, or China could bypass these sanctions by using digital currencies not regulated by the United States or its allies.