China’s digital yuan project, a blockchain-based cryptocurrency for consumer and commercial finance, can no longer be considered a pilot. That’s the assessment by economic and cryptocurrency experts.
Those experts have been monitoring efforts in China and other countries developing and piloting central bank digital currencies (CBDCs) with the aim of establishing a blockchain-based virtual cash that is cheaper to use and faster to exchange, both at home and across international 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 north of 100 billion yuan, or $13.9 billion. The country has literally given away millions of dollars worth of digital yuan through lotteries, and its central bank has also participated in cross-border exchanges with several nations.
If e-CNY continues to be adopted and becomes the de facto standard for international commercial and retail payments, the privacy of those using digital currency, as well as the US dollar’s days as the world’s reserve currency, could be at risk.
Whatever nation figures out an internationally accepted financial transaction network for digital cash will be the one to set the standards around it, “and then everyone else will have to follow them,” said Lou Steinberg, former Ameritrade CTO and managing partner at cybersecurity research firm CTM Insights. “Those standards will be designed with what the developer of them wants to accomplish. Surveillance could be built in.
“China wants digital cash 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 tied to your account, they know a lot. A similar concern about government monitoring exists in the US, though the motives for monitoring may differ from an authoritarian state.”
The US has been considering creation of a digital representation of the dollar for nearly three years. In March, President Joseph R. Biden Jr. issued an executive order that, among other things, called for more urgency on research and development of a US CBDC, “should issuance be deemed in the national interest.”
In November, the New York Federal Reserve Bank began developing a wholesale CDBC prototype. Named Project Cedar, the CBDC program hammered out a blockchain-based framework expected to become a pilot in a multi-national payments or settlement system. The project, now entering phase 2, is a joint experiment with the Monetary Authority of Singapore to explore questions around the interoperability of the distributed ledger.
“I don’t think we’re treating this like a Moonshot,” Steinberg said. “The Fed’s not saying this is the future, like it or not, and we need to have a say in how it unfolds, and therefore 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 a central bank’s authority, which is why they’re called central bank digital currencies.
Distinct from online retail payments, such as those made via a mobile device, wholesale cross-border payments are transactions between central banks, private sector banks, and corporations. Cross-border spot trades (or immediate payments) are among the most common wholesale payments, as they are often required to support broader transactions, such as for international trade or foreign asset investment.
While the US has made some advances toward creating a CBDC, it still lags far behind other nations.
For example, Project Dunbar brings together the Reserve Bank of Australia, Bank Negara Malaysia, Monetary Authority of Singapore, and South African Reserve Bank with the Bank for International Settlements (BIS) Innovation Hub to test the use of CBDCs for international settlements.
“We’re looking at 13 current wholesale projects with different arrangements between countries,” said Christian Catalini, the founder of the Cryptoeconomics Lab at the Massachusetts Institute of Technology (MIT). “The United States is clearly behind. Part of that is because there’s not a consensus that a CBDC is needed or useful. There’s only one clear nation leading the effort when it comes to both the scale of its experiment and its progress to date, and it is China.”