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The U.S. is deciding how to reply to China’s digital yuan

The U.S. is deciding how to respond to China’s digital yuan

China is beating the U.S. when it comes to innovation in online money, posing challenges to the U.S. dollar’s status as the de facto monetary reserve. Nearly 80 countries — including China and the U.S. — are in the process of developing a CBDC, or Central Bank Digital Currency. It’s a form of money that’s regulated but exists entirely online. China has already launched its digital yuan to more than a million Chinese citizens, while the U.S. is still largely focused on research.

The two groups tasked with this research in the U.S., MIT’s Digital Currency Initiative and the Federal Reserve Bank of Boston, are parsing out what a digital currency might look like for Americans. Privacy is a major concern, so researchers and analysts are observing China’s digital yuan rollout.

“I think that if there is a digital dollar, privacy is going to be a very, very important part of that,” said Neha Narula, director of the Digital Currency Initiative at the MIT Media Lab. “The United States is pretty different than China.”

Another concern is access. According to the Pew Research Center, 7% of Americans say they don’t use the internet. For Black Americans, that rises to 9%, and for Americans over the age of 65, that rises to 25%. Americans with a disability are about three times as likely as those without a disability to say they never go online. That is part of what MIT is researching.

“Most of the work that we’re doing assumes that CBDC will coexist with physical cash and that users will still be able to use physical cash if they want to,” Narula said.

The idea of a CBDC in the U.S. is aimed, in part, at making sure the dollar stays the monetary leader in the world economy.

“The United States should not rest on its current leadership in this area. It should push ahead and develop a clear strategy for how to remain very strong and take advantage of the strength of the dollar,” said Darrell Duffie, professor of finance at Stanford University’s Graduate School of Business.

Others see the digital yuan as insidious.

“The digital yuan is the largest threat to the West that we’ve faced in the last 30, 40 years. It allows China to get their claws into everyone in the West and allows them to export their digital authoritarianism,” said Kyle Bass of Hayman Capital Management.

Watch CNBC’s deep dive video into CDBCs to learn more.

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Yuan Longping, Plant Scientist Who Helped Curb Famine, Dies at 90

Yuan Longping, Plant Scientist Who Helped Curb Famine, Dies at 90

After graduating in 1953, Mr. Yuan took a job as a teacher in an agricultural college in Hunan Province, keeping up his interest in crop genetics. His commitment to the field took on greater urgency from the late 1950s, when Mao’s so-called Great Leap Forward — his frenzied effort to collectivize agriculture and jump-start steel production — plunged China into the worst famine of modern times, killing tens of millions. Mr. Yuan said he saw the bodies of at least five people who had died of starvation by the roadside or in fields.

“Famished, you would eat whatever there was to eat, even grass roots and tree bark,” Mr. Yuan recalled in his memoir. “At that time I became even more determined to solve the problem of how to increase food production so that ordinary people would not starve.”

Mr. Yuan soon settled on researching rice, the staple food for many Chinese people, searching for hybrid varieties that could boost yields and traveling to Beijing to immerse himself in scientific journals that were unavailable in his small college. He plowed on with his research even as the Cultural Revolution threw China into deadly political infighting.

In recent decades, the Communist Party came to celebrate Mr. Yuan as a model scientist: patriotic, dedicated to solving practical problems, and relentlessly hard-working even in old age. At 77, he even carried the Olympic torch near Changsha for a segment of its route to the Beijing Olympics in 2008.

Unusually for such a prominent figure, though, Mr. Yuan never joined the Chinese Communist Party. “I don’t understand politics,” he told a Chinese magazine in 2013.

Even so, the Xinhua state news agency honored him this weekend as a “comrade,” and his death brought an outpouring of public mourning in China. In 2019, he was one of eight Chinese individuals awarded the Medal of the Republic, China’s highest official honor, by Xi Jinping, the national leader.

Mr. Yuan is survived by his wife of 57 years, Deng Zhe, as well as three sons. His funeral, scheduled for Monday morning in Changsha, is likely to bring a new burst of official condolences.

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China’s digital yuan must beat Alipay, WeChat Pay first: PIIE

China's digital yuan needs to beat Alipay, WeChat Pay first: PIIE

China’s digital yuan must first dethrone the country’s domestic e-payment giants before it can think about competing against the greenback internationally, says Martin Chorzempa of the Peterson Institute for International Economics.

“A lot of people talk about (the digital yuan) as a driver of renminbi internationalization,” Chorzempa, senior fellow at PIIE, told CNBC’s Street Signs Asia on Wednesday. “I think they have to beat Alipay and WeChat Pay in China before they can contain the US dollar.”

“It will essentially be the central bank versus the big tech companies, and that will be very interesting to watch,” he said.

“It’s going to be essentially the central bank versus the big tech companies, and that’s going to be pretty interesting to watch.”

Martin Chorzempa

Senior Fellow at the Peterson Institute for International Economics

China’s central bank developed the digital yuan and is expected to work in a similar way to transactions through existing payment apps. The country’s capital, Beijing, recently spent $ 1.5 million on a digital currency test during the New Year celebrations after similar experiments were conducted in Shenzhen and Suzhou.

Photo taken on Feb. 12, 2021 shows a digital red RMB envelope during the Digital Wangfujing Snow and Ice Shopping Festival in Beijing, capital of China.

Costfoto | Barcroft Media via Getty Images

Chorzempa said one of the main reasons behind the push for the digital yuan was the desire for a government-sponsored and controlled alternative to established giants like the Alibaba-affiliated Alipay app and Tencent’s Wechat Pay, which currently process about 95% of digital payments in China.

Unlike most of the other major economies around the world, mobile payments – primarily through the Alipay app and Wechat Pay – have ousted cash as the predominant form of consumer payment in China in recent years.

“(The digital yuan) is something that is truly unprecedented in the major economies,” said Chorzempa. “China is … by far the most advanced in digital currency and it’s exciting to see.”

“Nothing like Bitcoin or Ethereum”

However, Chorzempa said China’s digital yuan has very little to do with cryptocurrencies like Bitcoin, which are known for their high price volatility.

“I would say that the level of security (the digital yuan) is very high and the risk is low,” he said. “It’s the same value as any regular renminbi, so there shouldn’t be any fluctuations in price to worry about.”

Intermediaries selling the digital currency in China are also likely to be “fairly safe and carefully regulated” as long as they are approved by the government, Chorzempa said.

“I wouldn’t worry about the safety of a digital renminbi in a central bank regulated wallet,” he added.

According to the PIIE researcher, Sweden is expected to be among the first advanced economies after China to adopt a digital currency.

Ever since Facebook first proposed the launch of the Libra cryptocurrency, which has now been renamed Diem, there has been a “great surge of interest” among central banks fearing that a private tech company “might take over their currency,” much like Alipay and WeChat Pay payments dominate in China, he said.

“I assume that the central bank’s digital currencies will continue to expand worldwide,” said Chorzempa.

– CNBC’s Evelyn Cheng contributed to this report.