China’s launch of a central bank digital currency ahead of the rest of the world has been a public relations coup, with some pundits declaring that Beijing has thrown down the gauntlet to dollar hegemony. In fact, the nascent digital yuan’s potential to disrupt the greenback’s global dominance remains nearly non-existent; the first stage of the rollout is focused on the domestic market, while cross-border applications will face the same constraints as those in the existing Chinese fiat currency until Beijing liberalizes exchange and capital controls.
In a recent white paper, the People’s Bank of China (PBoC) clarified that point about the e-CNY’s applications. To be sure, the white paper mentions cross-border usage, but explicitly states that the main application for the digital yuan will be domestic payments. Financial inclusion – by promoting a digital fiat currency easily accessible to Chinese citizens – is one goal of the e-CNY, especially as cash use continues to decline.
Of course, China has already done an admirable job of boosting financial inclusion with digital finance; it’s just that Big Chinese Tech dominated earlier efforts. To that end, with the e-CNY, Beijing intends to promote competition and interoperability among e-wallets. If the digital yuan, which can be used in existing e-wallets and will have its own digital wallet as well, ends up curbing the dominance of Alipay and WeChat Pay, Chinese regulators will likely be pleased.
