The future of money: Digital currencies as decisive connectors

As we surge into the third decade of the 21st century, money is undergoing a radical change once more. China has developed a Central Bank Digital Currency (CBDC), introducing the digital version of the Yuan, the Digital Currency Electronic Payment (DC/EP) 

Wednesday, 31 March 2021

A century ago, amid the roaring twenties, money underwent a fundamental change with the credit card making its debut in the United States of America. The use of notes and coins of different currencies had been predominant for centuries, and the onset of a new mode of transaction was revolutionary. 

While the first internationally accepted credit card was introduced in the 1950s, it was at end of the 20th century that heavy reliance was experienced, as cards had a preponderant influence on the world of finance. 

As we surge into the third decade of the 21st century, money is undergoing a radical change once more. China has developed a Central Bank Digital Currency (CBDC) introducing the digital version of the Yuan, the Digital Currency Electronic Payment (DC/EP). 

With pilot projects in Shenzhen, Shanghai, Suzhou, Chengdu and Xiongan, the new form of currency will see an up-scaling of the financial system, a reinvigoration of day-to-day exchanges and a resounding impact on China’s monetary dealings with the world. Further, Chinese investors, business travellers and tourists will drive the circulation of the DC/EP to a greater extent.

Over the last several weeks, the cities of Beijing and Suzhou have seen a lottery in which 200, 000 ‘red packets’ of digital currency were distributed through a lottery. Each ‘red packet’ is estimated to be worth Rmb 200 and is part of the trial phase of the large roll out that is taking place throughout the year. Whilst Central Banks globally have started exploring digital versions of their own currencies, it has been seen as a response to cryptocurrency projects which are decentralised. 

The CBDC enables regulation via monetary authorities and affords legality to the digitised currency. Although no country has launched a CBDC officially, the piloting in China is expected to intensify in 2021 with a possible launch later in the year ahead of the 2022 Winter Olympics in Beijing. This is seen as a crucial step in the internationalisation of the Yuan.

As China expands its influence in the global financial arena, trade and investment partners will see their transactions invoiced and settled in the Yuan. This trend is not confined to China, with an estimated 60 countries also experimenting with digital currencies. Although Sweden unveiled plans to become a cashless society by March 2023 with approximately 9% of its population using physical cash in 2020, and the Bahamas have also conducted trials and are finding means to use the digital currency, no country has made the same degree of progress as China.

Earlier this year, Agustin Carstens, General Manager of Bank for International Settlements, whilst speaking at the Hoover Institution Policy Seminar said that “even as they fight the fires related to the COVID-19 pandemic, Central Banks around the world have stepped up their CBDC design efforts. This should not be seen primarily as a reaction to the emergence of cryptocurrencies or the announcement of corporate stablecoin projects. Rather, they are proactively researching a new form of money and how it could improve retail payments in the digital area, in line with Central Bank mandates.”

The newly-appointed US Secretary of the Treasury, Janet Yellon has also weighed in to support digital currencies noting that “too many Americans don’t have access to easy payments systems and banking accounts, and I think this is something that a digital dollar, a central bank digital currency, could help with. It could result in faster, safer and cheaper payments, which I think are important goals.” 

Whilst the US Federal Reserve has been engaging in research in this sphere, the statement of the Treasury Secretary is seen as the closest to an endorsement from the American administration.

In the United Kingdom, The Bank of England has taken steps to introduce ‘RSCoin’, which has been developed at the University College of London. The Bank has pointed out that “the key innovation of digital currencies is the ‘distributed ledger’ which allows a payment system to operate in an entirely decentralised way, without intermediaries such as banks.”

Although such steps are being welcomed, concern grows for private banking institutions, which are keen to remain within the futuristic financial equation.  Japan, in adopting a varied approach to digital currencies has made private banks responsible for issuing digital yen, with some of the largest already identified to start issuing the currency in the course of this year. 

India has also started the process of creating a digital currency with Shaktikanta Das, Governor of the Reserve Bank of India stressing that “a central bank digital currency is work in progress. An RBI team is working on the technology side and procedural side, and how it will be launched and rolled out.”

With India preparing for the new currency, it is evident that the addition of Indian weight to that of China, the United States, Japan, and much of Europe, the enhanced use of this new form of money will receive an invigorated drive as the decade unfolds. 

The emphasis placed by China will primarily see the digital currency used within the country but changes are expected as the country develops its Cross-Border Interbank Payment System (CIPS) through which the transactions in the Yuan sidestep the SWIFT system introduced for international payments. 

In 2019 alone, 980 financial organisations in 96 countries processed CNY 135.7billion a day, making the Chinese currency the 8th largest international trading currency at 1.22 % of the total market share. Although assumed to be relatively low in comparison with the American currency that tops the largest traded international currency table with 45.58% of market share, the wide spread international interactions of China which continue to grow is likely to have a greater impact. 

Back in December 2015, the International Monetary Fund awarded the Chinese currency reserve currency status, and thereafter added the Yuan to the Special Drawing Rights basket in October 2016 giving the currency parity with the British Pound, Euro, Japanese Yen and US Dollar. As the currency gains ground internationally, mainly through its trade and investment, the country will have a profound impact. Given that numerous countries partner with China, the impact would grow exponentially enabling the Chinese currency to gain momentum and thereby in turn influence the interactions of China. 

While the gaining of ground of its currency remains the main priority of China at present, the next and most significant step would be the digital currency roll out going beyond the limits its main cities. Countries with strong trade and investment links with China, especially through engagement in the Belt and Road Initiative, will need an overhaul of their national financial systems with immediate measures to strategise for such an eventuality. 

While the pandemic forced innovation on institutions and individuals, the reliance on physical payments for purchases are being discouraged and the move to the virtual domain is fast becoming the new norm. The rapid changes internationally, particularly in China within this sphere, make it imperative for countries to strategise. While the transition requires time, technology, and thorough understanding, it is clearly imminent. 

Although the steps taken in China and other countries are seen as initial steps towards a digital future, the road ahead is long but vital, if countries are to remain relevant, as digital currencies become the decisive connectors of the 21st century.