Why are Sovereign Digital Currencies Inevitable?
Cryptocurrencies are undeniably here to stay and governments around the world don’t want to be left behind. Driven by the rising interest in contactless payment, the high cost of cash, and reservations over the volatility in some cryptocurrencies, countries have been ramping up their launch of Sovereign digital currencies over the past year. Among all those countries, China is taking the biggest step with hopes of using its nascent digital currency to help internationalise the yuan.
Same as traditional money, sovereign digital currencies are issued and governed by the world’s regional central banks, but in digital form. A central bank digital currency (CBDC) would use digital tokens and blockchain technology to represent a country’s official currency and the value of sovereign digital currencies will be equivalent to their physical counterparts.
Different from decentralised cryptocurrencies such as Bitcoin and Ethereum, China’s sovereign digital currency, namely the Digital Currency Electronic Payment (DCEP) also known as e-Yuan, is managed privately by the People’s Bank of China (PBOC) under a centralised system.
According to Guo Weimin, the chief scientist at the Bank of China, the key advantage of the e-Yuan system is its ability to trace cash flow and make it easier to enforce financial regulations, which are absent from traditional payment systems and create huge challenges for the real economy. So far, pilot programs have been rolled out in the Chinese cities of Shenzhen, Suzhou, Xiongan and Chengdu. Digital red packets — based on the gift envelopes traditionally given out during holidays and special occasions — have been provided to consumers for spending at retail shops and restaurants. While there is no official timetable for the launch of DCEP, the People’s Bank of China is reportedly aiming to release the e-Yuan before the start of the Winter Olympics — an event expected to take place in February 2022 in Beijing.
Following China’s move, Japan is also gearing up preparation for the issuance of digital currency in both public and private sectors. “We are seeing a once-in-a-millennium change in the history of currencies after the long-time use of currency notes following the world’s first introduction in China about 1,000 years ago,” said Masashi Nakajima, a professor at Reitaku University and a former BOJ official. He also commented that advances in technology including blockchain to counter cyberattacks and counterfeiting have largely contributed to the realization of digital currencies while people are now able to use CBDCs anywhere at any time via their smartphones.
The Bank of Japan has said it will launch a feasibility study on its digital currency in fiscal 2021 starting in April. “The bank considers it important to prepare thoroughly to respond to changes in circumstances in an appropriate manner.”
Besides these two major economies, many others are heading in the same direction — a number of G20 countries say they are exploring the concept. Norway, Sweden, Switzerland and Cambodia have also announced they are looking at introducing digital currencies, as is Brazil.
WadzPay plans to support Sovereign currencies and welcomes them to its platform.