China, the US, and Europe are all developing digital versions of their currencies. But it is a game of grand politics more than it is a quest for financial inclusion and better financial experiences, says expert.
Forget your online bank. In the future, you can store your digital money in a wallet directly with the National Bank.
That is the promise of the e-currencies – also called Central Bank Digital Currencies – that 86 per cent of the world’s central banks are developing, according to the main organization of central banks, the BIS.
This year has seen the launch of large-scale e-dollar and e-euro projects, while Sweden, among others, has made so significant progress with their e-krona that they are now testing it with banks. It was however China that made the biggest head start, as work on a digital version of the yuan began as far back as 2014.
The long-term goal is the replacement of physical cash. Not just for the sake of efficiency, but also to hinder money laundering, gambling, corruption, and financing of terrorist groups. In April this year, the Chinese national bank launched the first official beta tests. Since then, 34.5 billion yuan ($5.3 trillion) have been processed, with more than 20.8 million users attached to the service, according to Bloomberg (https://www.bloomberg.com/news/articles/2021-07-16/china-s-digital-yuan-trial-reaches-5-3-billion-in-transactions). A full-scale launch is expected to happen within the next year, where the Winter Olympics in Beijing may serve as testing grounds for international use.
The Currency of High Politics
Critics have already derided the digital yuan and e-currency in general as tools of governmental surveillance of citizens and their financial transactions.
Since China is so far the only large economy with a project in the testing phase, it is hard to say how appropriate this criticism is. According to Andres Steno Larsen, Chief Global Strategist at Nordea, there is nevertheless no doubt that the digital yuan will force the Western economies to take e-currencies seriously.
“China’s point with launching a digital currency before anyone else is built on the hope that this can bring other developing countries – first and foremost on a regional level – into this digital network. And they are doing just that, because the more they rope other countries into their technological spider’s web, the greater the chance that world trade will be conducted with the yuan,” he says.
Today, the dollar is the dominant currency reserve in world trade. But the digital yuan is a possible new contender for that position, Larsen believes.
The most important question in decisions on whether a currency should be a reserve or not, is whether it is a currency widely used in world trade. After all, the point is to use it to back up one’s own currency if that ever becomes necessary. If world trade is conducted with yuan, then it becomes more efficient to have that in reserve,
Andres Steno Larsen, Chief Global Strategist at Nordea
While the official goals are better financial experiences and less money laundering, Larsen believes that e-currency is just as much an arena of high politics on the world stage.
“There is no doubt that if China succeeds in tying their region to the digital yuan, it is first and foremost a slap in the face of the United States. The US enjoys tremendous strategic advantages in Southeast Asia because of the strength of the dollar reserve. If China manages to challenge that, my guess is that it will end with tanks deployed somewhere. Because the US would not accept such a loss,” he says.