As US wades into digital currency arena, China’s e-yuan already has a big head start
- US central bank says a digital sovereign currency would support the US dollar’s international role, as its dominance in global payments is already being challenged
- Federal Reserve is soliciting public comments until May 20, marking the US’ first foray into the sovereign digital currency arena
The US central bank has voiced concerns that central bank digital currencies (CBDCs) could weaken America’s dominance in the global financial system, while calling for more research and public support.
In its first-ever research report on a potential US digital currency, titled “Money and Payments: The US Dollar in the Age of Digital Transformation”, the US Federal Reserve said a digital dollar would best serve the US’ needs by being privacy-protected, intermediated, widely transferable and identity-verified.
One of the key benefits listed in the Fed’s discussion paper is the potential support for the US dollar’s international role, but the Fed will not proceed without clear support from the executive branch and from Congress, ideally in the form of a law.
China woos new digital yuan users in major push
“It is important, however, to consider the implications of a potential future state in which many foreign countries and currency unions may have introduced CBDCs,” the report said. “Some have suggested that, if these new CBDCs were more attractive than existing forms of the US dollar, global use of the dollar could decrease – and a US CBDC might help preserve the international role of the dollar.”
Meanwhile, questions remain over the impact of global inflation amid the coronavirus pandemic, as a result of stimulus measures, and there are fears that financial markets and capital flows could become more turbulent as easing policies are implemented.
The Fed is soliciting public comments until May 20, marking its first foray into the sovereign digital currency arena.
Wu Qi, head of the Wuxi Institute of Digital Economy, said that there are a lot of considerations to be made in the development of digital currencies, noting that it looks to be an area of international competition in the future.
The US dollar’s dominance in international payments is already being challenged by the euro.
Data from Swift – the Society for Worldwide Interbank Financial Telecommunication, which dominates the international payments system – showed that the US dollar accounted for 40.5 per cent of global payments in December, down from 42.2 per cent two years earlier, but the share of the euro jumped to 36.7 per cent from 31.7 per cent in the same period.
The European Central Bank published a digital euro research report in late 2020, and then launched a two-year, digital-euro investigation project in July.
The world’s second-largest economy has been piloting the digital yuan’s use in 10 regions – Beijing, Shanghai, Hainan, Suzhou, Chengdu, Xiongan, Changsha, Dalian, Xian and Qingdao. In addition to 261 million digital wallets being opened, the e-yuan has been used in transactions totalling 87.6 billion yuan (US$13.8 billion). As of the end of December, it was being accepted by more than 8 million merchants.
China’s digital yuan wallet nearly doubles user base in two months
Meanwhile, Beijing has been collaborating with Hong Kong, Thailand and the United Arab Emirates to explore the use of digital currency in international markets.
It will also use the Winter Olympics next month to make the e-yuan even more mainstream, with wearable payment devices and e-yuan wallets provided to athletes.
“The [Fed’s] report indicates the US’s intention to catch up,” said Qu Qiang, a senior fellow with Renmin University’s International Monetary Institute.
However, Qu also suspects that any issuance of a digital US dollar will be a long process, while China’s strict capital controls affect the yuan’s international use.
“The e-yuan is not set to directly challenge the US dollar hegemony, but it may be one of many tools to lift [China’s] currency status in line with its economic power,” he added.
