In October 2020, the People’s Bank of China made headlines after it launched its first-ever digital currency, e-CNY (Electric-Chinese Yuan). Over 50,000 residents of Shenzen, one of China’s most technologically advanced cities, received a red envelope worth 200 Yuan or $30. This marked a big milestone for the whole world, as this was the first step towards CBDCs (Central Bank Digital Currency). This was also a testament to Asia’s aspiration to lead the whole world in integrating technology with the region’s financial landscape.
As the world embraces technology in the financial sector, CBDCs are emerging as the next frontier for central banks worldwide. Asia, a region that has long been at the forefront of technological advancements and economic dynamism, holds immense potential to revolutionise the region’s financial system. Many countries like China, Japan, India and South Korea are experimenting with the CBDC technology. This can prove to be a bridge between the Asian countries to become more economically stable, much like Europe did with the Euro.
Table of Contents
Central Bank Digital Currency: A New Frontier
Central Bank Digital Currency, or CBDC, is a form of digital currency issued by a country’s central bank. Unlike cryptocurrency, which is a decentralised and unregulated asset, CBDCs are centralised and directly associated with a particular country’s currency and central bank. In layman’s terms, CBDCs are just like regular banknotes and coins but in a purely digital form.
CBDCs offer various advantages over traditional currency. They can be used digitally once, making financial services available for the unbanked and underbanked population. This will also make the transaction much more safe and secure. Moreover, there will be fewer fraud cases, considering that central banks constantly monitor CBDCs to have greater control and promote transparency.
Why Prefer CBDCs Over Cryptocurrency
The reason why countries will prefer CBDCs over cryptocurrency is embedded in the way both currencies are used. Cryptocurrency is mainly used as an asset, so the price of a cryptocurrency is not regulated. It depends on its trade volume, practical use and market speculations. Anything that is not regulated has high volatility, making it unsuitable for government use because the government cannot rely on something based on speculations as it can be very unstable. This is where CBDCs come in, as the central banks regulate them and are much more stable than cryptocurrency. This means governments now have a digital currency that is not unstable like cryptocurrency, which is a win-win situation.
China: Paving the Way for the World
China’s Digital Yuan, also known as E-CNY or digital renminbi, is perhaps the world’s biggest and most successful CBDC project. According to estimates, the People’s Bank of China began working on its CBDC project as early as 2014, and as a result, it is at the forefront of technology. As of July 2023, E-CNY has been introduced in more than 20 cities, including some of China’s most prominent cities like Beijing, Shanghai and Chengdu, with around 260 million wallets in all of these cities combined, accounting for over 100 Yuan or $14.5 billion in transactions. The CBDC was even used in the 2022 Winter Olympics in Beijing, where it was used to facilitate cashless transactions for athletes and spectators.
China’s government envisions the E-CNY as a key tool for financial inclusion. Their aim is to bring digital banking services to rural and underserved areas where banking services are scarce. Moreover, the digital yuan is seen as a strategic move to challenge the dominance of the U.S. dollar in global trade. However, China faces some significant challenges, including privacy concerns and the potential impact on commercial banks. Still, the country remains determined, with officials suggesting a nationwide launch in the coming years.
India: Taking It One Step Further
When it comes to digital transactions, India has no competition whatsoever. With the help of its Unified Payment Gateway (UPI), India has made significant strides in digital finance. In 2022 alone, India registered 83 billion transactions worth over $1.5 trillion. Building on this digital infrastructure, RBI (Reserve Bank of India) introduced an e-₹ to enhance inclusion further and streamline transactions. In November 2022, RBI launched two versions of this digital currency, retail and wholesale. The retail version is primarily aimed at use in everyday transactions, while the wholesale version is supposed to be used in transactions between financial institutions. The pilot program has been rolled out to various cities in India, including Mumbai, New Delhi and Bengaluru.
Along with providing banking services to people of rural regions in India, the digital rupee can also help the government save the costs of printing and handling physical currency, which amounted to around $671 million in 2021.
Asia’s push towards CBDCs is driven by several factors, including enhancing financial inclusion, improving payment efficiency, and maintaining monetary sovereignty. However, there are some significant challenges, and at the forefront are the cyber attacks associated with digital infrastructure. Despite these hurdles, the potential benefits of CBDCs are unparalleled. According to a 2023 study by the Bank for International Settlements (BIS), 60% of central banks globally are actively working on CBDCs, with Asia leading the charge.
