China last year became the first major economy to pilot a central bank-issued digital currency—a digital yuan, also referred to as the eCNY—and interest in the potential of such currencies in many other countries is also on the rise.
The impact of the digital yuan may not be that significant in the near future for companies with manufacturing or trading operations in China given that this currency is in a pilot stage and focused mainly on individual consumer adoption. However, the path forward for the digital yuan to become the primary currency in China has been set; it may only be a matter of time before it is the norm even for business-to-business transactions such as payments to suppliers, revenues from industrial customers, bank financing or capital investments with joint venture partners.
Adoption of a central bank-issued digital currency—or CBDC—in any other country may not be as much a business concern, considering such currencies are more convenient, potentially eliminate merchant fees, do not require an internet connection (as in the case with the digital yuan) and provide traceability to combat illegal transactions. Ordinarily, too, peoples’ hesitations to digitize hard cash can delay adoption. However, given what we know of China’s governing style, the potential for a choiceless adoption of digital yuan should be a point of consideration for foreign companies operating in China.
Race to Digital
A CBDC is a digital version of a country’s paper currency, very much issued and controlled by the respective central banks, unlike cryptocurrencies such as Bitcoin and others which are decentralized and unregulated. And the interest in CBDCs is on the rise.
Thirteen other countries—including South Korea, Singapore, Saudi Arabia and Sweden—are also piloting a digital currency. And the number of countries exploring the viability of a CBDC shot up from 35 in May 2020 to 81 countries as of July this year, representing over 90% of global gross domestic product, according to the Atlantic Council GeoEconomics Center. Of the regions with the four largest central banks—the United States, Europe, Japan and England—the United States is furthest behind.
China may be racing to issue its digital currency to assert a controlled alternative to decentralized currencies such as Bitcoin, or perhaps it wants to diversify away from a U.S.-dominated currency in a geopolitically tense world. Perhaps it wants to strengthen its surveillance over its citizens through a cashless society and curb money laundering. Whatever the reason, it appears that the Chinese digital yuan is making strides: The Central Bank of China has stated that as the adoption of digital yuan increases, it will gradually replace cash and coins with the digital yuan making it the primary currency. The government could even mandate the adoption of eCNY, leaving companies no choice. Even without a mandate, companies may still be forced to adopt it if their ecosystem demands it. U.S. companies that have operations in China or do business with Chinese vendors need to take notice of this changing landscape.
Currently the digital yuan is being piloted mostly in consumer-facing businesses such as restaurants, retail shops and ride-share services. The scope of testing has also expanded to include pilots for B2B payment settlements between two fuel trading companies, “technical testing” for cross-border usage (mainly with Hong Kong) and salary payments by certain companies.