Several countries have deployed a CBDC, including The Bahamas and Nigeria. While no major economy had launched one prior to this year, the People’s Republic of China was determined to be the first. There is always a first mover advantage, and China was willing to have the yuan as the first CBDC among competitors, such as the US, Europe, and Japan. A crucial factor at play here is driving innovation and disrupting the payment ecosystem, while preserving the safe and efficient functioning of the payment ecosystem. The main question being asked is, how will these growing CBDCs impact current payment providers?
We’ve already seen early partnerships unfold, including Tencent-owned WeChat’s support of China’s digital yuan, e-CNY. This is an interesting move from the country’s largest messaging app and payment service, as, in effect, they are potentially cannibalising their own systems by allowing customers to use the digital yuan instead of their own existing payment options.
The People’s Bank of China (PBoC) declared the digital yuan as a retail CBDC aimed at domestic retail payment demands. However, it has also been made explicit that it will explore ways to improve cross-border payments. Since its original conception in 2014, the digital yuan has been tried, tested, and modified over the years, and the Beijing Winter Olympics in early 2022 was the perfect lab to test how foreigners could access and use the digital yuan for their payments while in China. And as we wave goodbye to this year’s momentous games, reports show that payments of about 2 million digital yuan, equivalent to over $315,000, were made every day at the Olympics.
There are exciting things to come out of the development of digital currencies, and partnerships established with tech vendors are accelerating the roll out process, but will it all be smooth sailing? And what can we expect in the years to come?
The biggest obstacles
There are potential short- and long-term challenges when rolling out a CBDC, especially as organisations and countries alike are never sure of how the economy will embrace change.
The PBoC is well-aware that its population is used to make digital payments, with about half of the point-of-sale payments made with a mobile wallet or app. Such an adoption of digital payments by the people is due to the work of two big techs, Alibaba and Tencent. Their apps, Alipay and WeChat Pay, account for about 94% of the mobile payments market. As a result, PBoC is leveraging its digital yuan with the work of Chinese big techs.
The PBoC has declared that the digital yuan adopts a centralised management model and a two-tier operation system. The right to issue belongs to the state, whereas authorised operators and other commercial institutions exchange and circulate the digital yuan to the public. Therefore, apparently, big techs and their apps will be part of the operational system of the digital yuan. If that is the case, online payments will be possible as usual, and Alipay and WeChat Pay will be able to operate with and promote the digital yuan.
What are the global implications of the digital yuan?
It is rather natural that Beijing wants all businesses using the digital yuan, especially during major international events, like the past Winter Olympics. As before, the games were the perfect showcase for a retail CBDC that is to be tested for efficiency and safety. If western businesses are able to join the Chinese payment system in a seamless and efficient manner through the digital yuan, this will be a success case in worldwide press.
A successful rollout of the digital yuan is one of many steps in the internationalisation of the Chinese economy. The fundamentals, along with the efficiency and openness of the Chinese economy, will determine the internationalisation of the Chinese yuan too.
All in all, the digitalisation of the yuan could aid China to better position itself in the global financial ecosystem. However, to be clear, there is more to global financial hegemony than the rollout of a digital version of the currency, especially when the aim of the digital yuan has been reported to be domestic retail payments.
Ultimately however, CBDCs have the power to shape the future of money. We can expect to see greater movement in the years to come, especially as the EU and other national bodies prepare to roll out their own version of digital currency.
So, watch this space.