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Digital Yuan for Immediate Domestic Use, Cross-Border Later

The People’s Bank of China (PBoC) Governor Yi Gang has confirmed on Sunday Oct 17 that the digital yuan’s focus is on domestic and retail use for now.

At an online meeting of the Group of 30 International Banking Seminar, Yi Gang reportedly said that cross-border and international usage of the digital yuan is “a little bit complicated” due to requirements over issues such as money laundering.

He added that using the digital currency to promote China’s Belt and Road initiative was “not our priority at this point”.

There have been speculations that China wants to promote the digital yuan’s international usage to challenge the US dollar’s dominance and the transaction system of the world’s leading provider of secure financial messaging services, SWIFT. 

The claim by the PBoC Governor resonates with the findings of the recently-published Chainalysis’ 2021 Geography of Cryptocurrency Report which suggests that China appears to be developing the digital yuan for immediate domestic use, and possibly future international use. 

The blockchain firm cites a video published by the state-owned China Global Television Network that presents the digital yuan as a way to circumvent sanctions and reduce US influence over world trade. Yet, it states that China’s short-term goal for the digital yuan is to improve monetary policy and financial surveillance of Chinese citizens. In the long term, the digital yuan’s proliferation with other central bank digital currencies (CBDCs) could compromise the US dollar’s status as the world’s reserve currency, it adds. 

In his contribution to the report, Yaya Fanusie, an Adjunct Senior Fellow at the Center for a New American Security, shares the short and long term outlook of the digital yuan’s threat impact on the U.S. dollar. He says the digital yuan and other future CBDCs by other countries could hurt the dollar’s status in the world financial system through arrangements where countries easily enable CBDC-to-CBDC exchange.  

Arrangements like that could see automatic currency exchange taking place between countries without any of them having to touch their non-native currency. These transactions wouldn’t rely on the SWIFT system, he states, hence the less need for people outside of the U.S. to hold U.S. dollars. 

“This isn’t a risk for 2022, but probably more for 2032 and beyond,” says Fanusie, who believes it will take some time before China’s ruling Chinese Communist Party starts promoting digital yuan use outside of China.

In the immediate sense, he sees the digital yuan and its rollout as offering the Chinese government a centralized database to access records of all citizens’ transactions directly without having to pass requests for data through mobile payment apps which takes time and could be argued.

Fanusie also sees the digital yuan as part of a larger war of data proficiency in which the U.S. risks falling behind.

Meanwhile, China has continued with its pilot trial of the digital currency. Beijing last week launched a promotion to encourage the use of the digital yuan for public transportation.

The Beijing Local Financial Supervision and Administration confirmed to local media that subway and bus passengers in the capital city can receive coupons from its website to get discounts to pay as low as 0.01 yuan when paying fares with the digital currency.

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