As sports fans settle in for a fortnight of daredevil bobsleighing and ski jumping at the Beijing Winter Olympics, China’s monetary authorities are making a daring manoeuvre of their own.
The Games marks the first time China’s fledgling digital currency, known as the e-yuan or e-CNY, will be showcased globally since testing began. Athletes and their teams are able to use the virtual currency at Olympic venues, such as cafes and shops.
Issued by the China’s central bank, the People’s Bank of China, the e-CNY is a digital version of the nation’s official fiat currency, equivalent in value to the domestic renminbi.
As distinct from cryptocurrencies such as Bitcoin and Ethereum, the e-CNY is not based on a distributed blockchain model, by which no-one owns the currency and the transactions are recorded on far-flung computers.
That means, it’s not a ‘crypto’ per se.
To date, a handful of smaller nations have adopted such central bank digital currencies, or CBDCs. The Bahamas was the unlikely pioneer in late 2020 with its Sand Dollar, while Nigeria has gone live with the eNaira.
According to American think tank, the Atlantic Council, 90 countries are exploring – or launching – their own CBDCs. But for advanced nations, China’s tentative foray into the space could be the double-somersault show-stopper.
Under a pilot scheme launched in April 2020, the e-CNY was first trialled in four cities across China and is now available across many more, including the major population centres of Shanghai, Beijing and Shenzhen.
Intended for frequent, small-scale purchases and transactions, the digital yuans are available through seven authorised commercial banks and two online banks. The transactions are not done via a bank, but directly from a user’s digital wallet to the recipient.
eToro market analyst Josh Gilbert notes that when it was released, the e-CNY digital wallet became the most downloaded app in China for five consecutive days. According to reports, around 120 million registered users – about 10 per cent of China’s adult population – had signed up by October 2021.
“Of course, it will take some work to integrate the currency into citizens' everyday lives, however, we anticipate that this will make basic transactions much more straightforward and seamless,” Gilbert says.
He points to an “array of benefits” of CBDCs such as helping unbanked populations and linking traditional and new payment services. They can also reduce the risk of fraud with digital certifications, digital signatures and encrypted storage, he adds.
“CBDCs also have the potential to meet the needs of an evolving digital economy, whilst maintaining the trust of a central bank,” he says.
As for Australia, there are more than a few moguls and chicanes to be negotiated before we use an official digital coin to buy our milk and Vegemite.
In its final report last year, the Senate select committee into Australia as a Technology and Financial Centre proposed a Treasury review of the idea.
But the Reserve Bank of Australia has “not been convinced to date that a strong policy case has emerged in Australia for a CBDC,” according to RBA head of payments policy Tony Richards.
“The primary reason has been that Australia's existing electronic payments system already provides households and businesses with a wide range of safe, convenient and low-cost payment services,” he said in a recent address.
Having said that the RBA completed Project Atom in December, a proof-of-concept exploration of using CBDCs for wholesale transactions.
It’s also engaged in Project Dunbar to further prototype shard platforms for cross border transactions. This exercise is in conjunction with the Bank of International Settlements and the central banks of Malaysia, Singapore and South Africa.
The other members of the newly-minted AUKUS Alliance – the US and Britain – are also sceptical.
As with the RBA, the US Federal Reserve notes improved existing payments systems and the “uncertain risks and benefits” of a CBDC.
In the UK, the House of Lords Economic Affairs Committee found that while there certainly were advantages, CBDC adoption could create financial stability and privacy issues.
Echoing the sentiment of his peers, committee chair Lord Forsyth of Drumlean dubbed the idea as a “solution in search of a problem”.
BTC Markets CEO Caroline Bowler, however, believes an “e-AUD” is inevitable, given many of Australia’s trading partners will be going down the CBDC path.
“The history of money shows us it is an ever-evolving concept,” she says.
“CBDCs aren’t for the economy of today or yesterday. Their role is within the emerging digital economy that is currently partially built, with greater innovations and change to come.”
As with the lugers tackling the downhill Olympics course feet-first at speeds of up to 150 kilometres an hour, monetary regulators will need all their wits to navigate this rapidly changing digital currency landscape.
The views expressed in this article are those of the author and do not necessarily reflect those of the Westpac Group.