Is There No 'Digital Won' When There's a 'Digital Yuan'? [Reading Science]

1 yuan Central Bank Digital Currency (CBDC) leaked on Chinese Weibo and other platforms.
[Photo by YouTube screen capture]

[Asia Economy Reporter Kim Jong-hwa] The Chinese government announced that it will issue the 'Digital Yuan' starting this month. Although it is still in the pilot issuance phase before official release, the fact that the Chinese government is issuing digital currency amid the COVID-19 pandemic carries significant implications.

As COVID-19 swept across the globe, contactless payment methods have gained popularity due to concerns that viruses clinging to banknotes could spread infectious diseases. China has made a strategic move in this context. While the official reason given is to facilitate use by people worldwide during the 2022 Beijing Winter Olympics, it is widely analyzed that the real intention is to reclaim the hegemony held by the US dollar through the Digital Yuan.

Currently, about 90% of international trade settlements and approximately 60% of global foreign exchange reserves are managed in US dollars. In contrast, the Chinese yuan accounts for only about 2%. As long as the dollar remains the key currency, trade transactions and international investments cannot be conducted without going through the US financial system. The US exerts its hegemony by excluding countries like North Korea and Iran from its financial network or by imposing sanctions that block transactions with other countries.

In this situation, if the digital currency led by China spreads in the long term, countries and companies trading with China will be able to settle trade in yuan through blockchain networks without using the US financial system, thereby weakening US control. Could the Digital Yuan shake the US financial hegemony?

Recently, China Central Television (CCTV) and others reported that the People's Bank of China has formalized the 'Central Bank Digital Currency (CBDC)' project and is conducting pilot projects targeting general retail stores in Shenzhen (Guangdong Province), Suzhou (Jiangsu Province), Xiong'an New Area (Hebei Province), Chengdu (Sichuan Province), and the Winter Olympics host area (around Beijing).

The National Development and Reform Commission's Xiong'an New Area branch held digital currency briefings for companies like Starbucks and McDonald's, and Suzhou city plans to pay transportation expenses to public officials using the Digital Yuan. Additionally, the Agricultural Bank of China, one of the country's four major state-owned banks, is testing a smartphone application that can process digital currency payments.

What kind of currency is the Digital Yuan that the Chinese government intends to issue? The Digital Yuan is a 'Central Bank Digital Currency (CBDC).' Digital currency is electronic money where the amount is recorded in an embedded chip and deducted from the store's terminal when purchasing goods.

CBDC differs slightly from typical digital currencies (cryptocurrencies). CBDC is a currency issued directly by the central bank using blockchain or distributed ledger technology, stored electronically to replace or complement physical nominal currency. Depending on the issuance target, it can be divided into general small-value payment types and large-value payment types between financial institutions.

Since it is implemented electronically, unlike cash, anonymity can be limited, interest payments are possible, holding limits can be set, and usage times can be controlled. While it shares the digital foundation with general cryptocurrencies, CBDC is directly managed by the central bank, whereas cryptocurrencies are traded on decentralized blockchains without third-party intervention.

The Digital Yuan is an ambitious project launched by the People's Bank of China after six years of preparation. China has already entered a 'cashless society.' Due to rampant counterfeit banknotes, stores prefer Alibaba's 'Alipay' or Tencent's 'WeChat Pay' over cash. Mobile payment usage is so widespread that there is a saying, 'Even beggars ask for alms via QR codes,' making mobile payments a daily routine for Chinese people.

So why does the Chinese government insist on additionally promoting CBDC? First, CBDC has a much greater impact as it encompasses both the currency and payment functions of the central bank. It is a stable currency guaranteed by the central bank, and since the central bank can monitor all transaction data, it has the positive function of blocking money laundering, gambling, and terrorist financing.

However, concerns are unavoidable that it could become a tool for a 'Big Brother society' where authorities perfectly monitor every individual's financial activities. Especially with the explosive growth of Alipay and WeChat Pay, the existing financial sector is increasingly dissatisfied with the situation where 'banks do the work but mobile payment companies take the money,' and the People's Bank of China feels its monetary sovereignty is threatened.

Central banks around the world are rushing to issue CBDCs. It is expected that digital won will soon circulate in Korea as well.
[Photo by YouTube screen capture]

It appears that these issues are expected to be resolved through the issuance of CBDC. Even if consumers want to pay with Alipay, if a store only accepts WeChat Pay, they have to go elsewhere. However, since CBDC is the same as banknotes, it can be paid with any app and through commercial bank apps. The existing financial sector can regain some of the payment dominance currently controlled by the two mobile companies.

Due to these various circumstances, dozens of central banks worldwide are currently considering issuing CBDCs. The Dutch central bank, which developed CBDC before China, introduced the digital currency DNB Coin in 2015. Although it is not circulated publicly, it is used internally within the bank.

The world's oldest central bank, Sweden's Riksbank, announced plans to issue a national digital currency to improve the national payment system, and global overseas banks such as Spain's BBVA and Santander are leading the adoption of blockchain technology.

The Bank of France also officially announced the development of digital currency as the first in the Eurozone, and Japan, a 'cash society,' is reportedly reviewing CBDC issuance. Until recently, central banks worldwide denied the existence of cryptocurrencies as currency, but now they are actively issuing CBDCs.

A representative example is the Bank of Korea. Although it previously rated the necessity of CBDC issuance low, the Bank of Korea is now hastening the issuance of a digital won. On the 6th of last month, the Bank of Korea announced that it will conduct a pilot operation related to CBDC issuance next year. Although somewhat late, this is a welcome development.

However, some supplementary measures seem necessary. The inconveniences faced by low-income and elderly populations must be addressed first. Consideration is needed for people without bank accounts or who do not use mobile payments. Privacy concerns must also be resolved. Since financial tracking is possible, clear standards are needed on how much privacy should be protected.

Despite these drawbacks, the advantages such as reduced currency production costs and the ability to track corruption and tax evasion outweigh them, which is why central banks worldwide are rushing to issue CBDCs. We look forward to the day when the digital won can be used as soon as possible.