China's rollout of digital yuan puts pressure on Fed to keep pace

The development of China's central bank digital currency has gotten off to a fast start in the new year, putting fresh pressure on the U.S. government's efforts to digitize its own money.

"Central banks and governments take cues from each other," said Eric Grover, a principal at Intrepid Ventures in Minden, Nevada. "The digital yuan is cited by virtual currency advocates as a reason to launch a Federal Reserve digital dollar."

China this week launched an e-wallet app for Android and iOS that allows consumers to spend the country's digital yuan. It's an acceleration of the People's Bank of China digital currency project that dates to 2014, with other recent additions including e-commerce company JD.com accepting the digital yuan for payments. China is also expected to heavily promote its CBDC at the upcoming Beijing Olympics, scheduled to start Feb. 4.

Movement on the digital yuan comes amid activity in other countries. Just before the new year, Mexico announced plans to launch a CBDC by 2024. And the Bahamas this week announced plans to phase out domestic checks for payments, with the country's CBDC, the Sand Dollar, filling the void. For the dozens of countries that are considering CBDCs, there is a risk of falling behind.

"China is clearly a major global force, and the development of the digital yuan is one of the catalysts of central banks elsewhere speeding up their CBDC investigations," said Martha Bennett, a vice president and principal analyst at Forrester in London.

China's moves are a greater influence than CBDC rollouts in smaller countries, which often have local conditions that contribute to faster moves to digital currency, Bennett said. The pending Diem stablecoin, which was first announced by Facebook as Libra in 2019, is also a factor in accelerating CBDC development as central banks look to counter private stablecoins, according to Bennett.

A U.S. CBDC, or a "digital dollar," would require a congressional vote. Federal Reserve Chairman Jerome Powell has said the U.S. is not competing with China to develop a digital currency but is instead considering how a CBDC could address financial inclusion and improve the disbursement of federal payments. Sen Sherrod Brown, D-Ohio, has sponsored a digital dollar bill, which has not advanced in more than a year. There is bipartisan support in the House of Representatives for some form of digital dollar law, but legislation has not advanced. Brown's office did not return a request for comment by deadline.

"These launches in other markets help to push the big countries," said Antony Welfare, a London-based CBDC advisor and the author of "Commercializing Blockchain."

In the U.S., the Federal Reserve Bank of Boston this week posted a job listing for a director and product manager who will work on Project Hamilton, an MIT/Boston Fed initiative that is assisting the Federal Reserve in developing a potential Digital Dollar. The posting is a planned hire to support the next phase of technical research, a Boston Fed spokesperson said in an email.

"2022 has started big for CBDC globally," Jennifer Lassiter, executive director of the Digital Dollar Project, said in an email, noting the announcements from China, Mexico and the Bahamas. The DDP is a Washington-based partnership between Accenture and the Digital Dollar Foundation that works with public and private organizations to research a U.S. CBDC.

"The U.S. should take a leadership role in this new wave of digital innovation," Lassiter said, adding that the Bank for International Settlements and the New York Fed recently opened an innovation center to develop new payment technology for central banks globally. "This tells us that the hard questions are starting to be asked, the data is starting to be compiled, and we are already on the path towards an intentional, thoughtful process for consideration of a U.S. CBDC," Lassiter said.

Other countries are moving faster in response to global CBDC developments. Philip Lowe, the Reserve Bank of Australia governor, in late December expressed an openness to developing a CBDC given the global trends, reversing Australia's prior resistance to CBDCs.

"We have been continuing to examine closely the case for a retail CBDC and working with other central banks on this issue," Lowe said in a speech at an Australian payment technology conference. "We are working through the relevant technical issues, as well as the broader policy implications of any shift away from a payments system based on the movement of value between bank accounts, to one that uses tokens."

While use cases for CBDCs are still developing, the currencies are envisioned as a way to ensure financial access in a world in which cash is less common. Paper currency has declined from 40% of U.S. payments in 2012 to 25% in 2019 and 19% by 2021, according to Bloomberg, adding that CBDCs could support access to the financial system in an increasingly cashless economy.

While the complexities of monetary systems in countries such as the U.S. and U.K. have slowed CBDC development thus far, Welfare said the progress in the U.S., Australia, the European Union and elsewhere will allow overall CBDC projects to move at a faster pace.

"The progress will start to create more competition," Welfare said. "China is massively ahead of all other countries and is starting to tackle the critical adoption points."