China has opened tests for its digital yuan. The excitement around this project has electrified several major Chinese cities, as well as spectators around the world.
Most recently Shenzhen launched his “iShenzhen” lottery, in which the city government will distribute 20 million digital yuan among 100,000 central bank digital currencies, or CBDC, wallet holders. This will be on the back of a similar lottery held in the city of Suzhou, one of China’s most important “special economic zones”. Suzhou has already engaged in several blockchain projects in an effort to deepen the understanding and use of decentralized technology, smart contracts, and the general learning curve that locals may face.
As China continues to strengthen itself in the international economy, it is proving to be a leader in the race for CBDC adoption, an initiative that would make Chinese goods and services more accessible in the global market. Many tax policy and financial technology experts have argued that the digitization of public money is an inevitable consequence of distributed ledger technology.
The specific political and economic consequences of this shift to digital currencies will depend on the specific decisions made by governments regarding their approach to these new technologies. For example, China has taken an approach that has seen repeated success in today’s business culture.
A number of other countries, with economies of all sizes, are more or less waiting in the wings as the People’s Bank of China shows its leadership. In the experiments in Suzhou and Shenzhen, citizens are allocated digital yuan and are encouraged to link their digital wallets to their existing PBoC accounts, and if they don’t use the digital currency in a few weeks, it will disappear.
Nations are especially curious about how this program unfolds and what adoption looks like at a grassroots level. Businesses and governments have a natural incentive to embrace this technology as it reduces overhead and friction, which improves their bottom line. But what other incentives will prompt citizens to adopt an entirely different system of money and banking if their motives may not be linked to financial gain? These above-mentioned adoption trends will be a major driver in determining how soon other countries will start developing their own CBDCs.
Smaller countries have a better chance of faster launches
This experiment has sparked economic participation in China and sparked the interest of public banks around the world. Which countries have positioned themselves to follow China into the digital future? Certainly the influence of China, as well as a long-standing pro-technology culture across the continent, suggests that many East Asian countries will follow suit. The Bank of Thailand launched a CBDC pilot program back in June 2020. In addition, just last fall, the Bank of Korea announced plans for a CBDC issue in 2021, as Japanese bank officials have done articulated a more cautious, passive course after China’s CBDC.
Smaller countries, of course, have other obstacles to their financial experimentation. Recently the Bahamas introduced its “Sand Dollar” and Cambodia is “Bakong”, after China’s example. However, this is made possible by the smaller size of these national banking systems, which allows them to move more flexibly and with a degree of autonomy. This becomes an advantage for smaller countries as the global dependence on their currencies is also less so the interoperability issues are a lower priority than for global economies like the United States and China where it becomes a very critical aspect.
But larger countries are also showing more interest. A one-year research report published recently by the central banks of Saudi Arabia and the UAE, it appears that early adoption of digital currencies is beneficial – especially for large economies that have operated with a relatively higher degree of autonomy, as opposed to those in the eurozone or part from the North American Free Trade Association, for example. Like China, the governments of Saudi Arabia and the Emirates, given their production and natural resources, do not accumulate as much debt as is standard in other major economies in the West.
This reveals an interesting aspect of the adoption of CBDC, one that could affect the digitization process at public banks worldwide. While many factors determine how and when a particular economy can use digital currencies – such as size, pre-existing economic landscape, gross domestic product, etc. – an important aspect appears to be a strong national (as opposed to global) economic program . This is interesting not only because it marks certain countries as susceptible to CBDCs, but also because it emphasizes the importance of interoperability after a currency has been introduced. In other words, these digitization programs will be brought about through strong national economic policy control, but to sustain the global systems in which we live, these technologies will have to work together through intermediary programs.
Interoperability is critical to major economies
With a boost to all global CBDC initiatives, the Bank of International Settlements’ Innovation Hub, or BISIH, announced that CBDC research is a top priority it in 2021. It plans to gauge the feasibility of faster, cheaper cross-border payments. This initiative will be highly beneficial for global economies exploring the interoperability of their own CBDC projects using BISIH research and pilot trials to facilitate their own CBDC program and by working with them on all settlements and cross-border payment issues.
While the focus on domestic use cases is understandable for individual countries, CBDCs will only work in local sandboxes unless there is some sort of interoperable protocol. It is critical to bridge the gap between the different CBDC initiatives and existing payment systems and other digital currencies to ensure their success on a global scale.
While governments investigating the use of CBDCs are undoubtedly a step in the right direction, global trade will truly be driven limitlessly using an interoperable protocol, as our economic system is too versatile to be replaced by a single currency.
The views, thoughts and opinions expressed here are solely of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Sky Guo is CEO of Cypherium. His extensive knowledge of blockchain consensus, transactions and cryptographic algorithms comes from his background in computer science. With a Bachelor of Science from Pepperdine University and an entrepreneurship degree from Draper University, Sky also acts as a columnist for Caixin, a leading Chinese financial media outlet.