For the past few years, China has been proud of its efforts to promote China’s digital yuan (e-CNY). Armed with advanced technology, China believed e-CNY could help realize the internationalization of the yuan, and as a result, China wholeheartedly backed e-CNY, aimed at replacing cash, as well as m-Bridge, used to conduct cross-border payments.
However, the US has passed the Guiding and Establishing National Innovation for US Stablecoins Act. The bill disrupts the “status quo” of global currencies and payments, and it could also negatively affect China’s e-CNY campaign.
The e-CNY was supposed to replace cash. Since its trial in 2019, local governments in China have given cash handouts, hosted promotional campaigns, and even paid their employees’ wages and bonuses with e-CNY, all in an effort to boost its coverage.
Yet, as the user experience is no different from Alipay and WeChat Pay, people only use e-CNY during sales. We can see that as discounts dry up, e-CNY also loses its currency.
Things are not going smoothly for m-Bridge either. Western nations sought to sanction Iran and Russia by ejecting them from the global banking messaging network SWIFT. While this move devastated the two nations’ balance of payment, it also alarmed China.
To soften the blow China might be dealt when Western nations impose an economic blockade, China had been enthusiastic about its m-Bridge project. Initially, members of the project included Hong Kong, Thailand and the United Arab Emirates; at its peak, m-Bridge boasted 26 nations and organizations. However, the Bank for International Settlements (BIS) in April last year launched Project Agora and it withdrew from m-Bridge in October last year.
While the BIS explicitly stated that its withdrawal had nothing to do with the project failing or political reasons, it is widely believed the departure was due to the geopolitical concerns of Western nations; that is to say, it was trickier for m-Bridge to reach a consensus between its members than to solve the technical issues.
At June’s Lujiazui Forum, former People’s Bank of China (PBOC) governor Zhou Xiaochuan (周小川) and PBOC Governor Pan Gongsheng (潘功勝) both emphasized the importance of stablecoins. They believe stablecoins would reinforce US dollar hegemony, provide a lifeline for volatile US government debt, bring about revolutionary changes to cross-border payments and pose a major threat to the China-backed m-Bridge project.
The e-CNY is the fruit of China’s hard work over the past few years and it has attained numerous milestone achievements, but its success is at risk of being superseded by stablecoins. China is facing a dilemma: Should Beijing swallow its pride and abandon e-CNY, or should it continue defending the work that has already been done?
As the enemy breaches its line of defense, we must ask if e-CNY is to become another Maginot line.
Honda Chen is a senior researcher at the Taiwan Academy of Banking and Finance.
Translated by Cayce Pan
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