The People’s Bank of China (PBoC) created the e-CNY for specific reasons that speak to long-term strategic objectives of the central government: domestically, to strengthen resilience in a payments ecosystem dominated by Big Tech (Alipay and Tenpay) and gain greater control over the digital money supply, while in the cross-border space the aim is to gradually boost the renminbi’s global reach and perhaps in the long run establish a payment rail that can insulate China from geopolitical risks it faces from U.S. dominance of the international financial system.
China’s neighbors have no such grand strategy, and it remains uncertain if any of them will see the need to launch a CBDC in the future.
The Digital Yen
As the world’s No. 3 economy, China’s largest trading partner, and a rival of Beijing in certain respects, Japan is concerned that without a CBDC of its own, it will be at a disadvantage. Economic security minister Takayuki Kobayashi spoke to this concern in November 2021, when he told Reuters, "We must think about what could happen to Japan's national security if other countries move ahead” on CBDCs.
He did not elaborate, but an aide to Prime Minister Fumio Kushida said that Japan should work closely with the United States “to counter any attempt that threatens the dollar's reserve-currency status.”
The renminbi is a long way from challenging the dollar in anything except trade settlement with Russia though. This paradigm will not change because the Chinese currency is digital. As long as China’s capital and foreign exchange controls stay in place, the renminbi’s internationalization will be limited.
Meanwhile, the Bank of Japan (BOJ) appears to be in no hurry to approve a digital yen. In a report published last year that declared proof of concept in the first-phase study, it repeated its stance that it has “no plans to issue” a CBDC, though the Japanese central bank believes it is “important to be prepared thoroughly to respond.”
The BOJ is likely searching for a compelling reason to issue a CBDC. Almost all Japanese adults have a bank account, so not for financial inclusion purposes. As for cashless payments, Japan is a laggard compared to South Korea and China, but has picked up the pace under the Cashless Vision initiative and pandemic-driven trends. The Japanese government is targeting 40% of payments to be cashless by 2027. Having reached 32.5% in 2021, Japan can reach easily hit and probably surpass that milestone with existing digital payments options.
To be sure, some influential players in Japan’s private sector are interested in a digital yen. A consortium of more than 60 firms led by the financial groups of Mitsubishi UFJ, Mizuho and Sumitomo Mitsui has established a digital currency forum to begin trials to hopefully launch a yen-based digital currency, tentatively called DCJPYPY +0.3%, in the near future.
However, it is unclear how much traction such a project could gain without strong support from the BOJ.
The Digital Won
Compared to Japan, South Korea has some different considerations when it comes to a CBDC. While South Koreans are similarly well banked to Japanese, their use of cashless payments is much higher at 83%, so the idea of creating a digital won to reduce use of cash in the country is far-fetched.
One reason that the Bank of Korea (BOK) initially warmed to the idea of a CBDC was that it believed a digital won could constrain the use of cryptocurrency in the country. In March 2021, then BOK governor Lee Ju-yeol told CoinDesk Korea that CBDCs would reduce demand for bitcoin and other decentralized virtual currencies. Given their high volatility, cryptocurrencies face constraints on their functionality as a means of payment or store of value, he added.
That might hold true when it comes to payments, but many countries have already banned crypto for that purpose anyway. For those investing in digital assets for speculative purposes, it is unclear how the presence of CBDCs would affect their behavior.
Overall, Seoul has seemed cautiously optimistic about the potential for a digital won and has moved forward with testing, completing several phases, most recently in June 2022. While the BOK was satisfied with the use of the digital won for offline payments and cross-border remittances, the central bank found that the Ethereum-based blockchain did not perform to tis expectations, notably in regards to real-time processing of transactions during peak times, in which it cited “limitations,” as well as privacy technology.
Meanwhile, at a December conference in Thailand, BOK governor Rhee Chang-yong raised eyebrows when he expressed skepticism about the benefits of blockchain and other technologies relevant to CBDCs. "I was more positive before, but after seeing the Luna, Terra, and now the FTX issues ... I don't know (if) we will see the real benefit of this new technology, at least for monetary policy,” he said.
For its part, Taiwan been working on a digital New Taiwan dollar for several years, but appears to be lagging compared to both South Korea and Japan. Taiwan’s central bank is probably the most conservative in Northeast Asia, and had initially seen no clear reason to issue a CBDC. Like South Korea and Japan, Taiwan is well banked and can achieve its cashless goals with existing digital payment systems. The pandemic has accelerated what had already been a fast-moving albeit belated adoption of digital payments.
Nevertheless, peer pressure can be a powerful thing. Taiwan would not want to be the odd one out in the region, especially since some of its closest trading partners are all on working on CBDC initiatives.
In June 2022, Taiwan’s central bank chief Yang Chin-long said Taiwan had been simulating the use of CBDC in a closed loop environment. Henceforth, it would focus on three goals: “communicating with the public and winning their support, ensuring the system's stability, and building the legal framework for the currency's operations.”
"This will take a long time, at least two years, and then we'll have to evaluate it again,” he added.
Waiting And Seeing
Looking ahead, the further adoption of digital fiat currencies in Northeast Asia will likely depend on the results of pilot testing in each country as well as the progress of the e-CNY. Japan, South Korea and Taiwan are all more likely to push forward with their respective CBDC projects if they feel that digital fiat currencies are the wave of the future.
It is still early days, but the e-CNY looks more evolutionary than revolutionary. The PBOC said that total digital yuan in circulation reached RMB 13.61 billion by the end of 2022 and has called for boosting interoperability between existing e-payment systems and China’s digital fiat currency. In the meantime, China’s local governments are literally giving digital yuan away to boost adoption. Shenzhen reportedly gifted RMB 100 million ($14.7 million) in e-CNY to the city’s catering industry for the Lunar New Year. For its part, during the holiday Hangzhou gave each of its residents RMB 80 in e-CNY, in total RMB 4 million.
As for cross-border usage, we would take the results of the recent m-Bridge trial with a grain of salt. To be sure, the e-CNY was the most issued and actively transacted token in the US$22 million pilot that also included Hong Kong, Thailand and the United Arab Emirates, a Bank of International Settlement (BIS) report showed.
In a real-world situation, there would be many variables to consider. Unless most major economies develop CBDCs and stick with them, the digital yuan will be an outlier.
This is conceivable and even likely if we look at the historical development of China’s self-contained internet, payments ecosystem and overall digital economy.