How Is the Digital Yuan Threatening the US Dollar and Global Banking?

Will China’s Digital Yuan Replace Cash and Dominate Global Payments?

Discover how China’s digital yuan, launched in 2022, impacts the global economy. Learn why this pioneering central bank digital currency (CBDC) poses a growing challenge to the US dollar and traditional banking systems. Dive deeper into Rachel Cheung’s expert analysis to understand how the digital yuan could reshape the future of money—read the full article now to stay ahead of the curve in global finance!

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China unveiled the digital yuan at the 2022 Winter Olympic Games in Beijing. Yet despite its sluggish roll-out, China’s leadership remains committed to advancing the digital currency as the country’s primary form of payment and exchange. Journalist Rachel Cheung offers an examination of the digital yuan and its impact on China’s economy and on the global financial ecosystem. Executives and investors will find this a robust assessment of central bank digital currencies and China’s role in advancing the worldwide payment architecture.

Take-Aways

• In 2022, China became the first nation to launch a central bank digital currency (CBDC), the digital yuan.
• China’s initiative spurred other nations to explore opportunities CBDCs might offer.
• The US dollar and the existing global banking payment infrastructure face increasing pressure from the digital yuan and other CBDCs.

Summary

In 2022, China became the first nation to launch a central bank digital currency (CBDC), the digital yuan.

The movement toward sovereign CBDCs began in 2014 and gained momentum in 2019 when Facebook introduced the plans for its cryptocurrency, the “Libra Coin.” For Chinese officials, the Libra — a stablecoin tethered to the US dollar — represented a threat to China’s long-term economic and political dynamism. But the Libra never materialized. China intended its digital yuan to counter the dominance of the US dollar as a reserve currency and of cryptocurrencies. China prohibited all cryptocurrencies in 2021, while launching the architecture of the digital yuan and its delivery system “e-CNY.”

“China had led the revolution to go cashless with fintech giants Alipay and WeChat Pay, and it was now the first major economy to introduce a digital form 0f fiat currency.”

China’s leadership unveiled its digital currency — the first any government had issued — at the 2022 Beijing Winter Olympics. The stated goal of the initiative was to give the yuan greater international buying power while cementing China’s status as a global leader in financial innovation. Yet the 2022 roll-out did not meet expectations: During the Olympics, purchasers spent only $315,000 per day using the digital yuan, a tiny fraction of the spending generated during the games.

Despite its weak debut, Chinese officials pushed ahead with expanding the digital yuan’s role in the economy. By June 2024, the digital currency had accounted for approximately “7 trillion yuan ($982 billion)” of commercial activity.

China’s initiative spurred other nations to explore opportunities CBDCs might offer.

Jamaica, Nigeria, and the Bahamas have since issued CBDCs, while another 130 countries, responsible for about 98% of global economic output, are working on their proprietary CBDCs.

“The idea of a digital currency appeals especially to emerging economies, many of which, like China, are keen to create a more efficient payment system, promote financial inclusion, and reduce their dependence on the dollar.”

For Chinese officials, the biggest barrier to citizens’ full-scale adoption of the digital yuan is the market power and ubiquity of giants Alipay and WeChat Pay, which control 90% of the market for payments in China.

The US dollar and the existing global banking payment infrastructure face increasing pressure from the digital yuan and other CBDCs.

The digital yuan and other sovereign CBDCs could supplant America’s reserve currency status as well as SWIFT, the US-headquartered international system of payment messaging. A consortium of China, Hong Kong, Thailand, United Arab Emirates, and Saudi Arabia has teamed with the Bank for International Settlements Innovation Hub to create mBridge, an alternative to SWIFT that is not reliant on the US dollar.

“According to the Bank of International Settlements (BIS), a survey of 86 central banks last year showed a sharp uptick in experiments with wholesale CBDC — transactions between banks and other financial institutions, rather than consumers and businesses.”

In 2023, China’s nondigital currency surpassed the Japanese yen to become the fourth most-used tender in global transactions. Despite the yuan’s ascendance, 48% of all global transactions still use the US dollar. The United States cannot ignore the digital yuan and other emerging CBDCs, as they present legitimate alternatives to the existing payment and transaction infrastructure.

About the Author

Rachel Cheung is a staff writer for The Wire China.