As Digital Yuan Struggles, Does America Really Need a Digital Dollar?

In a speech Monday (Feb. 14), Mu Changchun, the head of China’s digital yuan project, said the cryptocurrency has not had a very big impact on the country’s financial sector so far.

Bloomberg reported that while speaking at an event hosted by an American think tank, the Atlantic Council, the head of the People’s Bank of China’s digital currency unit’s point was that its central bank digital currency (CBDC) project — formally e-CNY — hadn’t done any harm.

There had been no “significant ‘negative disintermediation effect’” Changchun said, and he didn’t expect one. He added that he believes the digital yuan will also enhance financial inclusion, Bloomberg said.

While the number of people who have downloaded the digital yuan’s electronic wallet has been skyrocketing — official figures put it at about 140 million by the end of October and 261 million by the end of the year — actual use has been at a trickle. The actual transactions using the digital yuan stood at just $13.68 billion, the PBOC said in January, up two-thirds from the $5.3 billon spent in the first half of the year.

“The big question we have is whether consumers are going to use this or not,” Linghao Bao, an analyst at the consulting firm Trivium China, told CNBC last month. While saying he expected a broader push by the government, Bao added. That he saw “no strong incentive for consumers to switch [from their current systems],” Bao said.

Is it Needed?

Which raises a broader point about blockchain-based CBDCs and their coexistence with fiat currencies: What’s the point?

There has been a stampede into CBDCs, which use the same technology as cryptocurrencies, in the past couple of years that began once China made clear that the digital yuan was fast becoming a reality.

And yet while there’s been a lot of talk about financial inclusion for the poorest sector, there are only two real explanations given about why it’s suddenly a priority for most of the world’s largest economies — and not a few of the world’s smallest, such as The Bahamas, whose Sand Dollar became the first true CBDC last year.

See: Real-Time Payments Are Coming — But Do We Need Crypto to Deliver It?

One is that it will make payments far faster and cheaper than the existing infrastructure, built well before the tidal wave of digital payments began sweeping aside fiat payments. But the growing ability of the traditional payments rails to do just that — the Federal Reserve’s Fed Now real-time payments program and The Clearing House’s RTP Network, for example —makes the rationale for making the kind of investment of time, money and distraction that the addition of a CBDC takes questionable.

Follow the Leader

The second is, well, because China’s doing it.

A year ago, Frederick Kempe, president and CEO of that same Atlantic Council, argued that “the U.S. can’t afford to fall behind in the global digital currency race,” noting that “throughout history the country that has taken the technological high ground in its era has most often also been the dominant international actor.”

He warned: “If the United States loses the high ground of financial technological innovation, combined with a weakening of the dollar’s global dominance, the benefits for Beijing would be considerable.”

Among other things, China could use its CBDC to attack the U.S. dollar’s dominant and powerful position as the world’s reserve currency.

On Jan. 12, Rep. Tom Emmer (R-Minn.) introduced a bill focused on Fed control of a digital dollar, saying, “In order to maintain the dollar’s status as the world’s reserve currency in a digital age, it is important that the United States lead with a posture that prioritizes innovation,” adding that it must not “compete with the private sector.”

A strong digital dollar supporter, Emmer has also advanced the financial inclusion argument.

Which brings us back to the point that Fed Now and RTP Network can arguably provide many of the back-end benefits a digital dollar would provide and that many payments-focused cryptocurrencies are advancing.

Read also: To Win Real-Time Payments Fight, Crypto Must Beat Mainstream FIs, Woo Regulators

China’s Different Rationale

China, however, has a reason for pushing a digital yuan that goes beyond the faster and cheaper payments argument: control.

With AliPay and WeChat Pay accounting for about 90% of the payments market, the Chinese government has made clear that it is worried and unhappy about its loss of direct control of a big financial sector.

And one focus of China’s push for a digital yuan has been getting people to use it in place of those two payments giants — as that wallet users to payments volume ratio makes clear. One notable point is that China has been aggressively integrating the e-CNY into AliPay and most recently WeChat Pay, which now both support it.

There’s still friction in the system, as the digital yuan requires another step. To use the two private apps, consumers just link a bank account, whereas using the digital yuan on those platforms requires setting up a separate electronic wallet and linking it as well.

“It takes time for people to start accepting e-CNY, given entrenched payment habits,” Bin Zhao, a PricewaterhouseCoopers China economist, told Reuters recently.

Zhao noted that authorities have plenty of tools to promote mass adoption of the e-CNY — like prioritizing its use as the way to pay utility and medical bills, for example. “A small push by the government will make a big difference.”

That’s not just something the U.S. government — and most other democracies — would have trouble doing. It’s something they likely do not see any need to do as fiat-based alternatives to cheaper and faster digital payments come online.