The World's Central Banks Compete in 'Digital Currency' [Tech Talk by Im Ju-hyung]

80% of Central Banks Worldwide Research and Develop Digital Currency
Aiming to Digitize Physical Currency... Expecting Increased Efficiency and Transparency
Most Active: China Seeks Reserve Currency Status Through 'Digital Yuan'

Cryptocurrency / Photo by Yonhap News

[Asia Economy Reporter Lim Juhyung] The spread of the novel coronavirus infection (COVID-19) has accelerated the digitalization of daily life worldwide. Amid this, the digitalization of the money we use, namely cash, is also gradually becoming a reality. This is thanks to the so-called 'digital currency,' which central banks around the world are silently competing to research and develop.

◆Digital Currency Realizing the Digitalization of Money

Digital currency refers to a currency that stores and transacts monetary value in electronic form. Among such 'virtual currencies,' Bitcoin, a cryptocurrency utilizing blockchain technology, is representative; however, digital currency is distinguished from general cryptocurrencies in that it is issued directly by central banks.

For example, Bitcoin is based on a decentralized network environment, making central control difficult, and its price volatility is high, making it impractical as a national currency. However, digital currency is much more stable because it is issued and supervised by central banks.

The country most actively introducing digital currency is China. On the 12th (local time), the People's Bank of China conducted a pilot test of its directly developed digital currency, the 'Digital Yuan,' in Shenzhen. Citizens selected as test subjects received 200 digital yuan (33,926 KRW) through the 'Digital Yuan app' and were able to use it like cash at 3,389 offline stores within Shenzhen during the test period.

Chinese Yuan / Photo by Yonhap News

The usage of the Digital Yuan is similar to existing electronic payments such as Alipay and WeChat Pay. By scanning a payment QR code with a smartphone, the electronic currency stored in the application (app) is spent. However, unlike typical electronic payments where money is withdrawn from a bank account or card, the Digital Yuan allows transactions directly without intermediaries.

The advantage of digital currency is transparency. By 'digitalizing' the currency we have used, central banks can more accurately monitor cash flow. This means it is easier to detect signs of money being used for illegal activities and reduce credit risks such as defaults. Additionally, the efficiency of monetary policy implementation, such as economic stimulus by central banks, is enhanced.

Not only advanced countries like the United States and Europe but also many other countries are researching digital currency for these reasons.

According to the Bank for International Settlements on the 22nd, over 80% of the 66 central banks worldwide have begun research and development on digital currency. The Bank of Korea is also preparing a digital currency pilot test targeting 2021.

◆Countries Dreaming of Economic Hegemony with Different Visions

However, the reason central banks worldwide are promoting digital currency is not simply for efficiency and transparency. Digital currency could become a tool for global 'hegemony competition' in the not-so-distant future.

International reserve currency, the dollar. / Photo by Yonhap News

For example, the Digital Yuan has the potential to become an alternative currency competing with the four major global reserve currencies currently used in the global market (Dollar, Euro, Pound, Yen). According to data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the current share of the yuan in international transactions is only 1.91%, far behind the dollar (38.96%), euro (36.04%), and pound (6.7%).

However, if the Chinese government takes the lead in introducing the Digital Yuan early and dominates the global digital payment system market, the yuan could hold a status in the digital service sector comparable to the dollar.

On the other hand, advanced countries like the United States and Europe, which already enjoy the status of reserve currency nations, are researching digital currencies to maintain their existing hegemony. They do not want private electronic currencies developed by entities like Facebook's 'Libra' or other digital currencies to shake the existing currency dominance.

Some suggest creating an international common digital currency to prevent any specific electronic currency from monopolizing the digital payment system.

Mark Carney, former Governor of the Bank of England, proposed the concept of a 'Synthetic Hegemonic Currency (SHC)' in August last year. SHC involves connecting each country's digital currencies through an international network to build a kind of 'global digital currency' used as a common global reserve currency.