Recently, the Central Bank Issued Digital Currency (CBDC) has begun to attract the attention of the public at large. There has also been much talk and media hype about the possibility that the Chinese digital yuan will be a global game changer and replace the dominance of the US dollar in the world market.
Many people believe that the emergence of digital currency issued by the Central Bank of China (PBOC) will dominate the global monetary and financial markets and compete strongly with the US dollar. They also assume that digitization will be the future revolution in the international monetary world market. However, global trade and international capital flow are mostly still happening in digital form, and the PBOC digitization of currency is a dream ambition, and not a game-changer.
The US dollar is regulated as a world currency by an executive order, and the markets have chosen it. This choice not only reflects the geopolitical dominance of the United States of America since the Second World War, but also reflects the size of the US economy and its dynamism, such as unparalleled liquidity, depth, strength of the financial system and capital markets, strong institutions, and strong protection of property rights within the United States.
The United States issues a safe asset that is a risk-free government bond, currently at USD 21,000 billion, which is the world's highest value. It's a safe haven asset for international investors, even accepting negative yield. This choice reflects the openness of the US economy, to absorb most of the imports from the rest of the world.
The Federal Reserve System, also known simply as Fed, is the central banking system of the United States of America, and highly reliable. As the global position of the US dollar has been asserted for a long period of time, increasing self-reinforcing systems have helped maintain the US dollar dominance across the globe. If anything could at all destroy the US dollar, it will be only the American people, and not the Chinese yuan or any other world currency.
Meanwhile, it is clear that China's current financial system is extremely weak. Banks are weighed under bad debts, and they could explode at any time. Capital markets, although developing, are only in their early stages, while the yuan is still not convertible. Most importantly, the capital account is tightly controlled, although the super-rich can still transfer money abroad easily. Contract enforcement is quite arbitrary, while accounting and auditing standards are still too loose and inadequate.
However, we have to admit on one fact, that China is a country with a great vision and pioneership, going far further than many developed countries in CBDC implementation. As early as 2013, the Chinese government and technology companies increasingly showed unity towards many goals and ambitions. This admirable relationship between the State and the market has further facilitated the introduction of CBDC.
Reformist leaders such as former PBOC Governor Zhou Xiaochuan have persuaded the Party leadership to open up financial sectors, that were previously only available to state-owned enterprises, to the private sector and banking sector, even daring to accept private companies such as Alibaba and Tencent to carry out lending and investment operations. Just a year after this bold idea, right after the Bitcoin boom in China, the PBOC officially started researching and then officially launched CBDC in 2020.
The world highly appreciates the PBOC for having a team of extremely talented experts, but the most important thing is that outstanding talent and the PBOC are not independent of the government. CBDC requires the personal identification (ID) of the holder of the digital yuan wallet. So it is a question whether people believe in CBDC to be used for monetary and financial policies.
A report by Goldman Sachs raises many questions but seems unlikely to be answered satisfactorily. When CBDC is ID-based, how far will that personal file go? What kind of non-monetary information should or should not be included in the ID? To what extent can account holders deny access to their data to third parties? Who does the government assign to manage and operate, and how is the government accountable to the CBDC?
An example of how this is put is the result of the recent Swiss referendum on the citizen ID system when implementing CBDC. The results showed that 64.4% of the people opposed this plan. Interestingly however, the objections to this proposal do not focus on the complete rejection of the ID recognition system. Instead, people believe that they must be provided entirely by the government but through a substantive accountability mechanism. In this regard, recent information shows that even the Chinese people are afraid of the digital yuan, so we have to wait and see if the governments of other countries accept it in international trade and investment.
What has raised concerns recently is that China may even politicize the digital yuan through proposals for international payments and funding through its “One Belt, One Road-OBOR” initiative. However, we must be aware, that while the renminbi is heavily used in China's trade payments, the yuan's current global financial role is still very low. The yuan has increased somewhat in global foreign exchange reserves since 2016 but has remained around 2% over the last few years, according to IMF data. SWIFT data shows that the yuan shows no signs of progressing as part of global payments and has no advantage against the US dollar as of now. In the future, it is possible that the use of the yuan to settle commercial and financial transactions will increase. Nonetheless, until they fully liberalize the capital account, letting the yuan exchange rate float, the future of the PBOC may not be the story of the near future.
While the benefits and risks of CBDC are still largely unknown, more and more Central Banks around the world are taking it seriously. In the ASEAN region, except for Vietnam, Laos, and Myanmar, there has been no movement, as the remaining countries are still implementing research and tests of CBDC. There is also a reason for Vietnam to adopt a cautious attitude towards the excessive complexity of CBDC, which is the requirement of digital payment information infrastructure, especially for attracting talented experts. This is not possible overnight in the current mechanism.
However, whether we like it or not, the research and readiness to deploy digital currency in some specific form and coexisting with cash are inevitable in a digitized world. Deploying digital currency may not be a priority, but it is certainly vital to maintain an awareness of its use in the future.