In the digital money race China is leaving the competitors far behind
Many so-called central bank digital currencies (CBDCs) are currently being tested or studied around the world. CBDCs have emerged amid the rise of thousands of cryptocurrencies, which are quickly disrupting traditional payment systems and pushing central bankers to innovate to compete. At this point there is no doubt that China is to become the first major economy to launch an official central bank digital currency. The country is a decade ahead of territories such as the US and the European Union when it comes to developing a central bank digital currency. Still, the project naturally faces a variety of economic and political challenges within the country and abroad.
The People’s Bank of China is at an advanced stage of developing its digital yuan, officially known as the e-CNY, although a date has yet to be announced for full issuance. Still, the development left other countries behind. Thus, in January this year the US Federal Reserve published in a paper into the pros and cons of a potential digital dollar asking for public comments on several questions. A fintech consultant and an author claims that China answered these questions seven or eight years ago, after it started its research on the subject in 2014. Indeed, China has been exploring a potential digital currency for almost eight years, but the first actual tests of the e-CNY system didn’t start until 2020. Those tests were launched in few provinces, and later expanded to more regions, including a number of big cities.
Yet, Asia has a lot to learn from Europe which is known for its firm stance on data protection and privacy in form of the General Data Protection Regulation. The battle for CBDC in the European Union and in the US is one of privacy. China has recently introduced data policy laws that are more rigorous than the EU’s GDPR.
However, the main problem facing the digital yuan domestically lies in encouraging its use in the first place. Feedback from the last few years of trials revealed little interest in the average user in switching to the e-yuan system when more developed and convenient alternatives already exist. Public perception is that the e-CNY doesn’t offer any reason to change due to issues ranging from lack of education on use to concerns over privacy to the generally inferior quality of state products. Some analysts speculate that the e-CNY will not be able to overtake private-sector alternatives at all without substantial government interference to the point of mandatory use.
Interestingly, in countries such as Thailand, Indonesia or Malaysia, people tend to rush to adopt digital innovations believing that they are a key to a better life. According to observations, digital innovative products seem more aspirational for poorer populations because they provide access to services and products that they never had before.
The digital yuan app is currently geo-locked and only downloadable in the regions authorized for trial activities. Nevertheless, the number of downloads has reached a quarter of a billion already.