That Decoupling Sound: China, the US and a Year of CBDCs

During the second presidential debate in 1992, candidate Ross Perot warned of a “giant sucking sound” of jobs leaving the United States for Mexico if the North American Free Trade Agreement (NAFTA) was to enter into force. This past year, you may have heard a giant decoupling sound as the economies of the United States and the People’s Republic of China went their separate ways. It is no secret that after two years of a trade war, ongoing bans on certain U.S. exports to Chinese technology companies with links to China’s military, bans on the use of Chinese social media like WeChat and TikTok in the U.S., and denials of Chinese investments in U.S. companies, the two countries are at economic and geopolitical loggerheads.  

The Chinese authorities, through the country’s Made in China 2025, have invested in a number of leading Chinese technology companies to dominate the future of 5G, artificial intelligence, genomics, robotics and semiconductor chips. The Chinese have used state-owned enterprises to bet on winners to directly take on U.S. big technology companies. One area of overt competition is in the creation of a central bank digital currency (CBDC).  

For years, China has banned cryptocurrency projects, outlawed exchanges and even blocked industry meetings, while figuring out how to use the disruptive technology for a sovereign-backed central bank digital currency to further centralize power in Beijing. This past year, the People’s Bank of China has rolled out its Digital Currency Electronic Payment (DCEP) initiative with a major pilot implementation project underway. Several lottery efforts to promote the DCEP were undertaken and a business-friendly, blockchain-services network was added.  

And so it was generally for the year 2020: Lots of traction for the Chinese version of a CBDC and plenty of retreat for a United States version of the same. Even Facebook changed its plan (and name) for its own digital token, the libra (now diem). In making his case for the libra back in 2019 in front of U.S. lawmakers, Zuckerberg threw China under the bus, stating that if the U.S. government did not let Facebook go forward China would develop and deploy a cryptocurrency backed by a sovereign yuan, scaled at global proportions. Zuckerberg’s testimony forced the world to wake up to the challenges that would come with central bank digital currencies. His testimony was also the catalyst for the Chinese authorities to speed up its deployment of the DCEP.  

The decoupling has begun.

This year saw a distribution of the DCEP to all commercial banks affiliated with China’s central bank, namely the four government-owned banks (Industrial and Commercial Bank of China, Agriculture Bank of China, Bank of China and China Construction Bank). Three telecommunication operators (China Mobile, China Telecom and China Unicom) are partnering. After the initial distribution to commercial banks, the commercial banks will then distribute the DCEP to consumers.  

Different banks are choosing different issuing/distributing modes. Some banks may independently experiment DCEP through smart phone apps, or collaborate with telecom operators and put it within SIM cards. The People’s Bank of China is testing the best way for DCEP so as to encourage different banks to try out different methods of use. With Shenzhen and Suzhou as the experimental sites, the testing is underway. Once the Chinese export the DCEP through its One Belt One Road initiative, it will be used globally, potentially ending the U.S. dollar’s reign as the world’s reserve currency. It was no surprise that at the Group of 20 Meeting on Nov. 21, Chinese President Xi Jingping advised the assembled countries with the most developed economies they should embrace CBDCs and they should “discuss developing standards and principles for central bank digital currencies with an open and accommodating attitude.”

While the G20 met, U.S. President Donald Trump was hitting the links on one of his golf courses, ignoring the raging coronavirus pandemic stateside and not taking the initiative to provide for a much-needed further stimulus package, let alone one that rolled out a digital dollar and smart apps to make the distribution simpler. Could it be that such a digitization does not involve the president’s signature on the check?  

And so the United States is still hesitant to move forward with a sovereign-backed digital currency. Plenty of others, however, are trying out the idea. We saw the SOV from the Marshall Islands, the sand dollar of the Bahamas, the Eastern Caribbean Central Bank’s project and a whole host of other states moving toward this new era of sovereign-backed digital currencies. While Venezuela’s petro and Iran’s own digital currency project were doomed attempts at getting around U.S. sanctions against their regimes, a number of international institutions have used the year to develop technologies for digital assets.  

The most surprising of these was the Bank of International Settlements (BIS), the central bank for central banks, which was caught flatfooted when the excitement over private cryptocurrencies filtered up to CBDCs. In March 2018, the BIS undertook a survey of 63 countries around the globe and analyzed trends of potential CBDCs. It concluded“that each jurisdiction considering the launch of a CBDC should carefully and thoroughly consider the implications before making any decision.” Not exactly cutting-edge stuff.  

The BIS moved from naysayer to adopter in 2020. And while in early 2020 some 80% of central banks (up from 70%) were investigating some form of CBDC, about 70% of central banks still see themselves as unlikely to issue any type of CBDC in the foreseeable future. But 10% of those surveyed did report they would be issuing a general purpose CBDC in the “short term.” It is looking like the U.S. will not be among those early pioneers.

In the wake of the abdication of a greenback version of a CBDC, other countries’ central banks, the BIS and Facebook have all attempted the equivalent of digital asset mulligans this past year. That some central banks are now moving forward from study to deployment demonstrates the power that states have mustered in their attempts to re-centralize power. After the U.S. government, and just about every other Western government, went to the mattresses over Facebook’s plan to roll out the libra, it turns out that Mark Zuckerberg was right: The Chinese are going to be the major force in sovereign-backed digital currencies. The decoupling has begun.