Keeping Ahead In the Digital Currency Challenge

Beijing has not been shy about thinking big nor shutting out the voices of its many critics. From the massive Belt and Road Initiative to its disputed territorial claims across the South China Sea, even China’s fiercest critics cannot deny that Beijing can think big. Launching a digital currency is a similarly ambitious plan that will add yet another dimension to competition between China and the United States, in which Beijing has a head start.

Online payment systems are nothing new, with private companies like PayPal and Venmo, both owned by PayPal, being an all-too familiar way of making online purchases, as are credit card providers such as Visa and MasterCard. Decentralized cryptocurrencies such as Bitcoin, meanwhile, have soared in popularity over the years but more as a speculative investment rather than for daily use by consumers. To date, most central banks including the Federal Reserve have focused more on how to regulate the encrypted market as well as online payment systems, rather than getting directly involved by creating a digital currency market themselves. But the move away from cash payments is only accelerating, and central banks are now playing catch-up to market needs. The question is, will digital currencies actually lead to more control of the financial systems at the cost of users’ privacy?

Then there is the question of challenging the U.S. dollar’s stronghold over the global economy. The fact that China has been ahead of the curve in promoting a digital yuan can be seen as prescient. The People’s Bank of China has launched pilot projects in four cities including Shenzhen, and Beijing and Shanghai are expected to join the central bank digital currency project sometime this year. 

It is, of course, easy enough to downplay China’s foray into the digital currency electronic payment system. After all, it is still in its infancy and limited to domestic use in select urban areas, rather than on a nationwide level. Nevertheless, the fact that the experiment has been successful to date and that it will be expanded to the country’s two biggest cities is noteworthy at a time when a move towards central bank-operated digital currency is not a question of if, but rather when it will take off.

The fact that the initial public offering of Alibaba founder Jack Ma’s fintech company Ant Group was suspended and Ma himself had not been seen publicly for three months after the government clampdown on his businesses is troubling.  

Wariness about the digital currency system being yet another means for the central government to gain more personal information by monitoring electronic transactions and even controlling payments is warranted. Having direct access to how and even whether payments are made can certainly add another dimension for the government to control.  What’s more, the fact that companies such as Alipay and WeChat Pay will face increasing scrutiny from the government as a direct competitor in the digital payment system space is clear. The fact that the initial public offering of Alibaba founder Jack Ma’s fintech company Ant Group was suspended and Ma himself had not been seen publicly for three months after the government clampdown on his businesses is troubling. 

It is clear that Beijing is determined to move forward with a complete rollout of a state-controlled national digital currency system before the 2022 Beijing Winter Olympics.  By pioneering a digital currency system, China will undoubtedly be able to declare on the global stage that it has moved on from simply being a factory to the world and has emerged as an international financial powerhouse. But by being the first mover on a system that will certainly be established worldwide in the future, China will have more than bragging rights. It will have the advantage of being able to set global standards regarding digital currency markets as well. Another concern will be the fact that developing countries that are dependent on Chinese capital may be more vulnerable to control from Beijing if their payments are monitored through digital currency as part of the development assistance agreement. 

Nevertheless, rather than underestimating or criticizing the central bank digital yuan project, it is imperative for other central banks including the Fed to play catch-up. With the efficiency and convenience of digital currency are global risks, not least the increase in potential for money laundering and the ability to skirt economic sanctions. Establishing digital currency regulatory frameworks and ensuring close cooperation among central banks will be critical as money becomes more digital.  

Follow Shihoko Goto, deputy director for geoeconomics and senior associate for Northeast Asia, on Twitter @GotoEastAsia.

The views expressed are the author's alone, and do not represent the views of the U.S. Government or the Wilson Center. Copyright 2020, Asia Program. All rights reserved.