China digital currency: could Beijing’s advanced e-yuan replace smaller Asian currencies?

Name: Is cryptocurrency too risky for China?
Uploaded: 2021-06-25T00:00:17.000Z
Duration: 6 min 54 s
Description: Is cryptocurrency too risky for China?

Financial authorities are weighing threats to monetary sovereignty as the race to launch a central bank digital currency (CBDC) heats up

The Bank of International Settlement says there is potential for a major CBDC, like the digital yuan, to replace smaller currencies

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China’s digital yuan is one of the most advanced CBDC initiatives in the world. Photo: Kyodo

Karen Yeung

Published: 8:00am, 25 Jun 2021Updated: 8:00am, 25 Jun 2021

Central banks around the world are developing sovereign digital currencies to improve international payments, but one concern that has emerged is that a foreign digital currency could displace a domestic one, especially in smaller Asian nations with less effective financial systems, analysts said.

There is potential for a major central bank digital currency (CBDC) to make inroads into daily transactions, causing harmful spillover effects in the domestic financial market and challenging monetary sovereignty, according to a report released on Wednesday by the Bank of International Settlement (BIS) Innovation Hub.

In a so-called multi-central bank digital currency bridge project, the BIS and central banks from China, Hong Kong, Thailand, the United Arab Emirates are tackling regulatory complexities and transparency issues related to cross-border payments.

“At the heart of the discussion on the international dimension is whether CBDCs will infringe upon a country’s sovereignty,” said Benoît Cœuré, head of the BIS Innovation Hub. “We don’t want CBDCs to be caught in the crosshairs of a technology war.”

China’s digital yuan is one of the most advanced CBDC initiatives in the world, with pilot tests carried out in 11 areas and cities, nd plans for trials at venues during next February’s Beijing Winter Olympics.

Multi-CBDC arrangements, which join digital currencies across borders, could yield considerable benefits. The G20 has made enhancing cross-border payments a priority. According to a survey of 50 central banks, 28 per cent are studying how to make their currency interoperable with international payment systems, the BIS said.

The Asean Financial Innovation Network – founded by the Monetary Authority of Singapore, the International Finance Corporation and the Asean Bankers Association – also said last week it is set to launch a digital currency sandbox to enable banks and fintech companies to test CBDC applications for multicurrency payment systems.

When China’s digital currency is fully-operational and other countries have their own, foreign currency exchanges are expected to be much faster and more efficient than bank wires.

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Is cryptocurrency too risky for China?