As the commencement of the 2022 Winter Olympics on February 4 in Beijing draws nearer, China’s top monetary authorities are preparing to stage the most high-profile test yet for digital yuan, the official electronic form of the country’s currency, within the event’s closed-loop anti-covid bubble.
The pilot program for the digital yuan, or e-CNY, will represent a key development in ongoing efforts by the People’s Bank of China (PBOC) to promote the further internationalization of the yuan, while countries around the world explore ways to bring about their own central bank digital currency (CBDC).
“The PBOC has long planned its roll-out of the e-CNY for the Olympics,” says Rich Turrin, a Shanghai-based analyst and author of Cashless: China’s Digital Currency Revolution. “The PBOC understands that the eyes of the world are upon it, given that it is the first large, industrialized nation to roll out a CBDC. Because of this, it also understands that there is both no rush, and that it has to get it right the first time.”
CBDCs are essentially the digital form of cash. Tied directly to a country’s central bank, they allow consumers to bypass third-party financial institutions, such as banks, when carrying out electronic payments. Among the various motivations for their implementation are the streamlining of monetary regulation and greater financial inclusion within a country’s economic system.
They also carry some potential risks. According to a research paper published by the Bank for International Settlements in November 2021, “CBDCs should be considered in the full context of the digital economy and the centrality of data, which raises concerns around competition, payment system integrity and privacy.”
So far, just nine countries have fully launched digital versions of their national currency, including Nigeria and eight Caribbean nations.
The upcoming Olympics will present Beijing with a valuable chance to showcase its own progress in bringing about the digitization of its currency. Foreign visitors to the city will reportedly be able to access China’s CBDC for carrying out transactions during their daily life within the Olympic bubble, even without having registered an account at a mainland bank.
“In order to get users on board with the digital yuan, the PBOC will have to provide a user experience that is equivalent to or better than that offered by the payment platforms Alipay and WeChat pay, which are ubiquitous in China,” says Turrin. “This is why the PBOC has always been clear that they want to work with the payment platforms, not against them.”
The digital yuan is still in its trial stages. Official data indicates that the cumulative value transacted so far by existing CBDC wallets stands at around 62 billion yuan ($9.7 billion), well below 1% of China’s total annual mobile payment market, which amounted to 52 trillion yuan in 2020.
However, recent developments suggest a significant increase in scale may be approaching.
Earlier this week, Shenzhen-based Tencent announced plans to offer a digital yuan payment function directly within WeChat, which already offers communications and various lifestyle services to more than 1.2 billion monthly active users. This week also witnessed the roll-out of new apps on leading mobile platforms, including Android and iOS, allowing individuals to open personal wallets and conduct payments using the digital yuan.
Going forward, a key test for China’s CBDC will be to see how the centralized system copes with heftier transaction volume on the same level as those processed by leading domestic tech firms Alibaba and Tencent.
Regarding Beijing’s hopes of leveraging its digital currency to further integrate the yuan into the global financial system, experts say any imminent displacement of the US dollar as the key reserve currency does not appear likely.
According to Turrin, “it’s not about the digital yuan replacing the dollar in global financial markets – that won’t really happen. What this does present is the potential to displace the dollar from regional trade transactions with China.”
In the meantime, the digital yuan project has already drawn the ire of some policymakers in the United States, China’s foremost economic competitor. In July, a group of Republican senators issued a formal request that the U.S. Olympic Committee forbid athletes from using the digital yuan, due to perceived security concerns.
Regardless, the e-CNY pilot program at this year’s Games will be conducted as planned. According to Chinese state media outlet Xinhua, some venues will even allow consumers to access digital yuan via “wearables such as smartwatches and ski gloves or badges to meet their diversified needs.”
Following the completion of the Winter Olympics, future efforts to internationalize the usage of the digital yuan will likely take place via cross-border trade channels between China and its neighbors.
According to Turrin, “Asia is the world leader in building CBDCs, and it is likely that the digital yuan will serve as a regional reserve digital currency.”