From the first day I started covering stories about the digital yuan, one question has constantly occupied my mind – What is the real relationship between the country’s push towards a central bank digital currency, or CBDC? , and the internationalization of the yuan?
Some argue that these are separate topics that should not be confused with each other. E-CNY is just a digital form of the yuan, on par with the physical form. It has little impact on the internationalization of the currency, which depends rather on the economic and commercial weight of the country as well as on the progress of financial openness.
But others think otherwise, saying that the e-CNY could play a necessary role in the internationalization of the yuan and even in transforming the geoeconomic landscape.
My view on this subject is that the e-CNY may indeed have a limited real impact on the internationalization of the yuan in the short term due to its focus on domestic retail scenarios.
But strategically, boosting the global profile of the Chinese currency would require a robust e-CNY ecosystem, as the rise of multiple CBDCs around the world is changing the determinants of a currency’s competitive advantage.
At the end of September, the mBridge platform – which explores multilateral cooperation regarding international CBDC payments – completed its first real-trade pilot test with four CBDCs, including e-CNY, supporting over $22 million in transactions from exchange. This amount appears to be low as official data showed that the value of transactions using e-CNY in domestic pilot areas exceeded 100 billion yuan ($13.8 billion) by the end of August, demonstrating the e-CNY’s current focus on national scenarios.
While many developed economies are focusing CBDC development on cross-border payments, e-CNY should be put on retail payments to facilitate daily transactions, said Zhou Xiaochuan, former governor of the People’s Bank of China, the central bank.
But Zhou also acknowledged that domestic retail apps can pave the way for cross-border e-CNY transactions.
“Obviously, retail payments (CBDC) are an important basis for cross-border payments,” Zhou said at a forum last month. “If two countries do not have effective and secure digital currency retail payment agreements, cross-border connectivity would be difficult.”
Stating its intention to explore cross-border CBDC applications, the PBOC pledged in an article this month to participate deeply in the international governance of digital currency.
In addition to actively participating in the mBridge project promoted by the Bank for International Settlements, or BIS, the PBOC has launched technical tests for CBDC payments between the Chinese mainland and Hong Kong, according to the article.
As the infrastructure for cross-border CBDC payments matures, e-CNY could help reduce the time and money costs of international payments and settlements, potentially encouraging more global use of the renminbi.
A BIS report noted that several CBDC settlements were able to complete international transfers in seconds, as opposed to the several days normally required for a transaction to be completed using the existing network of commercial banks.
In a world where nine out of 10 central banks are exploring CBDCs, it stands to reason that those who cannot catch up to the others in facilitating fast and secure international transfers of CBDCs would lose some appeal in the global monetary landscape.
This is one of the main reasons why a robust e-CNY system would be a prerequisite for the internationalization of the yuan in the long term.
As Song Ke, deputy director of the International Monetary Institute of Renmin University of China, puts it, the core of monetary competition could shift from grabbing more trading shares to providing information services for money networks. payment as CBDC systems mature.
Until then, economies with a strong foundation of digital services will be able to take new paths of monetary internationalization, while the monetary sovereignty of those with weak information technology strength could be compromised, said Mr. Song.
“It is too early to discuss the impact of the digital yuan on the global monetary landscape,” he said. “But the influence of CBDCs on the reform of the international monetary system would be considerable.”