Beijing is closer to bring its digital currency to mass adoption than Frankfurt and Washington. While the e-yuan is offensive, a digital euro and dollar will be defensive, and their shift will face more difficulties.
We had analyzed in 2019 how central banks planned to defeat decentralized currencies, such as Facebook’s Libra, by competing head on with them. Three years later, predictions are confirmed.
Central banks are creating their own central digital currencies, using their sovereign advantage to keep a monopoly over legal tender status. Even while Facebook's Libra (later renamed Diem) is officially dead due to firm opposition from regulators and politicians, central bank digital currencies (CBDC) are coming to life.
What is clear today is that China turns out to be an even bigger challenger to the US dollar than cryptocurrencies like bitcoin or the ill-fated Libra. The U.S. Federal Reserve isn’t as agile as China in shifting its currency into digitized form. China is combining unique advantages for this feat: technological advance, a huge population and highly centralized, even authoritarian regime. Another advantage is that its currency wasn’t internationalized, which paradoxically helps when it comes to digitizing it.
This explains that China is the first mover in the field of CBDC. Taking advantage of the current Olympic Winter Games in order to feature its digital version of the yuan, called the e-yuan or e-CNY, it is already achieving mass adoption domestically. The central bank app has surpassed a quarter billion users in a month.
Meanwhile, the EU and the European Central Bank isn’t in pole position. It plans to take a decision next year and has published a report at year-end, listing compelling reasons why it should launch a digital euro. But the complexity of the multi-level decision process in Europe is large, and that is a big disadvantage compared to China.
«The concept of legal tender is interpreted differently across member states. Implementing a digital euro would certainly benefit from the strengthening and harmonizing of national interpretations», states the report. But mostly, the report is a plea in favor of the euro’s superiority versus crypto-assets: «These assets are mostly unregulated, which poses high risks to users. Their price is highly volatile because crypto-assets lack any intrinsic value, which means that they trade like a speculative commodity. These characteristics limit the use of crypto-assets to only a limited set of investors and make their market illiquid […] The fact that the euro is a risk-free liability of the central bank makes it fundamentally different from crypto-assets.»
As to Switzerland, things are moving ahead on a technical level. For now, the e-franc project of the Swiss National Bank (SNB) is confined to commercial banks, and leaves out the general public. Tests have been conducted with the Swiss Exchange (SIX) and the Bank for International Settlements (BIS). They have shown that e-franc cross-border payments can be made, and blockchain-based CHF tokens can be bought and sold, using existing banking infrastructure. Most probably, Switzerland will just follow the pace of Brussels and Frankfurt.
Moving slower than all other monetary blocs, the U.S. Federal Reserve has just disclosed its own thinking about a digital dollar and the purposes it could serve. In a January report, the idea is that an e-dollar wouldn’t replace paper cash.
This in itself shows how the postwar dollar system isn’t ready to give up its dependency on cash and make the full technological shift, unlike China. The huge underground paper-dollar economy seems too big to let go.
According to a recent investigative report by The Economist, there is four times more dollar cash in circulation than twenty years ago. It is a misconception that everybody has shifted to electronic payments. According to the report, the piles of cash secretely moving in suitcases from airport to airport and crossing customs have never been as huge as today. What on the surface seems to be an 80s-style money laundering and tax evasion technique is more alive than ever. Speaking of dollar and sterling, half of all cash in circulation could be related to illicit activities and allows perpetrators to escape digital surveillance, says The Economist.
An e-dollar would rather fill a gap by providing digitized central bank cash to US citizens that have become used to e-payments. It is also clear that an e-dollar is a condition to keep the greenback’s world reference status, and prevent the e-yuan or decentralized currencies from treading on its toes.
The Fed report also undermines cryptocurrencies, saying that they haven’t become a means of payment as much as a speculative instrument, ridden with fraud, loss and theft issues. Stablecoins, or cryptocurrencies based on a basket of sovereign currencies, are seen as more serious, but are still discarded as less secure than the sovereign currency.
Big countries have actually pulled the innovative edge out of the hands of cryptocurrencies and used them to their own advantage. Digital currencies are now a superpower game. Just like cryptos but even better, they will provide security, allowing digital certificates, electronic signatures, and encrypted storage systems. They will prevent double payments, illegal duplications, and counterfeits. They will be stored on a smartphone wallet and transferred peer-to-peer with no clearing systems involved. They will be tradeable offline, like stablecoins.
Simply put, any advantage offered by cryptocurrencies or by China will have to be provided by the e-dollar. This time, the U.S. currency is no longer in the driver’s seat.