China heats up digital currency race

China's central bank has rolled out a digital yuan, dubbed e-CNY, for Olympians and visitors during the Winter Games.

Visitors to the 2022 Beijing Games will be able to download a digital yuan wallet app or store the digital money on a physical card. They can also get hold of wristbands, which can be swiped to make transactions.

The digital currency has been in the works since 2014 when the People's Bank of China, the country's central bank, set up a research group to study digital currencies. That was around the same time Bitcoin was gaining traction among investors, with its price surging above $1,000 (€875) for the first time.

The digital yuan's international debut for global users during the Winter Olympics follows more than a year of pilot runs in about a dozen regions across the country. At the end of 2021, more than 260 million people had e-CNY accounts and total digital yuan transactions reached nearly 90 billion yuan ($14 billion or €12 billion), according to the bank.

The Chinese central bank ramped up the trials of its e-CNY last month by launching the pilot version of the digital yuan wallet application on iOS and Android stores.   

China trails Bahamas, Nigeria

China's digital yuan is a form of a central bank digital currency (CBDC), which is being developed by many other central banks globally as unregulated cryptocurrencies take financial markets by storm.

While Beijing has a large lead over many global peers in developing an electronic sovereign currency, it's not a global leader.

That distinction belongs to the Bahamas, which launched the sand dollar in October 2020. The digital version of the Bahamian dollar is issued by the Central Bank of the Bahamas, much like cash and coins, and can be accessed by residents via a mobile app or using a physical payment card.

The Bahamian central bank expects the virtual currency to increase the efficiency of the country's payments systems, bring about greater financial inclusion and help curb money laundering and counterfeiting.

Last year in October, Nigeria became the first African nation to launch a digital currency — the eNaira.

The virtual currency uses the same blockchain technology as Bitcoin. But unlike the cryptocurrency and its peers, which are decentralized, the eNaira is issued and backed by the Nigerian central bank. The currency is not a financial asset in itself and derives its value from the official fiat currency. Additionally, digital naira transactions are in principle fully traceable.

Nigeria expects digital money to increase financial inclusion and facilitate remittances to the country, which is a prominent remittance destination in sub-Saharan Africa.

Cambodia with its Bakong and eastern Caribbean nations with their DCash are also among the frontrunners in the e-currency race. 

European Union, India also in the running

A 2021 survey of 65 central banks by the Bank for International Settlements showed that 86% of them are developing a digital currency. Some 14% of the banks said they were running pilot projects, while 60% were experimenting at the proof-of-concept stage.

Deutsche Bank expects that central banks representing about a fifth of the world's population, are likely to issue a CBDC in the next two or three years.

Most central banks are exploring the possibility of retail digital currencies, which can either be used by citizens or businesses. A handful of them, including the European Central Bank, are also studying wholesale CBDC projects for interbank transactions.

The European Central Bank launched a digital euro project in July of last year. The virtual currency project is currently in its two-year "investigation phase" to study the digital euro's design, feasibility and impact on the market.

"Advanced economies must overcome two barriers for populations to adopt digital currencies: lower interest rates and cultural/privacy norms," Deutsche Bank analyst Marion Laboure wrote in a note to clients.

India said earlier this month it would introduce a digital currency during the next fiscal year, which starts in April.

"We doubt that an 'e-rupee' will be in many people's (digital) wallets anytime soon," Mark Williams, chief Asia economist at Capital Economics, wrote in a note. "For many CBDCs, the key challenge could turn out to be indifference among intended users […] It is less clear what advantages they offer to consumers in countries that already have efficient mobile payments systems."

The US has been a laggard in the digital currency race, still debating whether to adopt a digital dollar. The Federal Reserve, the US central bank, released its long-awaited paper on a digital dollar last month. It explored the pros and cons of the virtual currency, but shied away from making any conclusions.

The CBDC architecture

Traditional currency issuance involves a central bank issuing money through commercial banks.

In the case of digital currencies, most central banks are exploring a hybrid architecture: a mix of the traditional two-tier issuance as well as single-tier issuance, which involves the central bank directly issuing the money to users.

"Because deposit accounts currently pay low interest rates, a CBDC has a potential to disintermediate the banking system," Laboure wrote. "People might prefer to hold their money directly at the central bank. Obviously, this would disrupt legacy bank franchises and impact financial stability."

Central banks have taken measures to limit the impact of their digital currencies on commercial banks. For instance, the Nigerian central bank has set daily transaction and balance limits on the transfer of funds from bank deposits to eNaira wallets. The European Central Bank is also likely to set a limit on the amount of digital money one can have.

Edited by: Tim Rooks