China sets the stage
China’s launch of a central bank digital currency ahead of the rest of the world has been a public relations coup, with some pundits declaring that Beijing has thrown down the gauntlet to dollar hegemony. In fact, the nascent digital yuan’s potential to disrupt the greenback’s global dominance remains nearly non-existent; the first stage of the rollout is focused on the domestic market, while cross-border applications will face the same constraints as those in the existing Chinese fiat currency until Beijing liberalizes exchange and capital controls.
In a recent white paper, the People’s Bank of China (PBoC) clarified that point about the e-CNY’s applications. To be sure, the white paper mentions cross-border usage, but explicitly states that the main application for the digital yuan will be domestic payments. Financial inclusion – by promoting a digital fiat currency easily accessible to Chinese citizens – is one goal of the e-CNY, especially as cash use continues to decline.
Of course, China has already done an admirable job of boosting financial inclusion with digital finance; it’s just that Big Chinese Tech dominated earlier efforts. To that end, with the e-CNY, Beijing intends to promote competition and interoperability among e-wallets. If the digital yuan, which can be used in existing e-wallets and will have its own digital wallet as well, ends up curbing the dominance of Alipay and WeChat Pay, Chinese regulators will likely be pleased.
Compared to other types of digital payment tools, the e-CNY differs in that it is legal tender, does not require a bank account, can be used offline and reportedly provides “managed anonymity,” although it will be easy enough for Chinese authorities to track these payments.
The digital yen
Compared to China’s up-and-running CBDC, Japan’s digital yen very much remains a work in progress, yet Tokyo appears likely to roll it out within a few years’ time. The speed of China’s e-CNY launch and its potential to give Beijing an economic edge have spurred Tokyo to create a digital fiat currency of its own to stay competitive with China.
Japan has some different goals than China when it comes to a CBDC. Financial inclusion is less of a priority given Japan’s wealth and well-banked population, while Tokyo has no pressing need to reduce oligopolistic practices among e-wallets. Rather, Japanese regulators sense an opportunity to accelerate digitization of the financial services sector and wean the country off of cash, which still accounts for more than 70% of transactions in Japan. The digital yen has the potential to help Japan improve payment and settlement efficiency, in particular, facilitate payments offline and outside of normal banking hours. A digital yen would have both domestic and cross-border applications.
In April, the Bank of Japan (BoJ) started its digital yen pilot, with the first phase focused on exploring the technical feasibility of a CBDC and slated to last until March 2022. In second stage, , the Japanese central bank plans to focus on digital currency design. During this phase, the BoJ will decide whether it should cap the amount of digital fiat currency issued and pay a remuneration on deposits. Finally, the BoJ will launch a pilot program for private companies and households.
At the same time, Japan’s private sector plans this year to begin experimenting with a digital currency using a common settlement platform. A group of 30 companies that includes Japan’s three largest banks will work on this project.
The aim, Hiromi Yamaoka, a former BoJ executive who chairs the group, told Reuters last year is to avoid a siloed platform and instead “create a framework that can make various platforms mutually compatible.”
The digital won
The most nascent of East Asia’s CBDCs is the digital won. South Korea only committed to a pilot in the past month, awarding its CBDC tender to Ground X, the blockchain subsidiary of super app Kakao. Given the fledgling state of the project, South Korea’s objectives for a CBDC are not totally clear yet. However, Seoul has realized – as Beijing did – that the central government can exert a larger role in the country’s digital financial future by issuing a digital fiat currency, even if citizens do not immediately adopt its usage in droves (likely to be the case).
The “simulated CBDC,” as it is sometimes called, will have a two-tier structure with the central bank in charge of issuance and financial institutions responsible for distribution (which should help address privacy concerns). The first phase will run from August to December and focus on issuance, distribution and redemption of the digital won. The second phase will run through June 2022 and focus on offline payments, digital-asset purchases and international remittances.
Interoperability with blockchains used by other CBDCs will be important to encourage use of the digital won by both businesses and consumers. Interoperability could make trade with overseas partners faster and less expensive for businesses, while boosting cross-border e-commerce for consumers. According to Statistics Korea, direct overseas purchases (goods bought directly from overseas e-commerce sites) by South Koreans jumped 44% on year to a record high of roughly US$1 billion in the first quarter.
If the digital won pilot is a success, Seoul will then have to consider the next step. It probably will not launch a CBDC immediately, as a study published in February found that Korea’s laws must be amended to allow for the issuance of a digital won. The report, co-authored by scholars from Seoul National University and Hanyang University, noted that at present the Bank of Korea Act allows the Korean central bank to issue only paper money and coins.
Given that both China and Japan – which expects to have a clearer idea of its digital yen will look like by late 2022 – are pressing ahead with their respective digital fiat currencies, it is hard to see South Korea doing otherwise. It just may take some time.