The People's Bank of China (PBOC) has been a global frontrunner in its creation of a central bank digital currency (CBDC) through the digital yuan's inception. Also known as the e-CNY, the PBOC recently released the pilot version of its e-CNY app in China's Apple and Android app stores. The release of this app to selected users is particularly interesting given the app's current "research and development pilot phase", as indicated in a displayed when the app is downloaded. notice Nevertheless, the timing of this app release gives the world excellent insight into China's e-CNY ambitions, particularly with the 2022 Winter Olympics and the Chinese New Year holiday around the corner. However, despite having a track record of development over the past several years, the digital yuan is facing a variety of challenges, chief among them demonstrating the e-CNY's international capabilities for use, to include cross-border capabilities. In , People China published a report that highlighted the digital yuan's role in internationalizing the RMB, with the report highlighting the potential of the e-CNY being used in cross-border transactions to August 2021 "build an international settlement network for mobile payments." Given this knowledge, what is next for the e-CNY, and how can other governments respond to increasing digital yuan usage both domestically and internationally? A history of the digital yuan's efforts in cross-border transactions China has been involved in several cross-border projects specific to the digital yuan in recent history, with the largest of these projects being the announcement of the "Multiple Central Bank Digital Currency (m-CBDC) Bridge," previously known as Project Inthanon-Lion Rock, in . February 2021 This CBDC project between Thailand, Hong Kong, and the United Arab Emirates primarily focused on wholesale CBDCs between banks in these countries. The utilization of this project heavily implies the testing of a payments framework between all four countries being potentially on the horizon. Other indications of interest in the digital yuan's cross-border ambitions include a history of the PBOC's test trials in the Luohu District of Shenzhen with Hong Kong residents, most recently in , with participants having access to discounts if they use the digital yuan for payments. April 2021 In this example, Hong Kong residents were incentivized to use the e-CNY when visiting China, whether these visits were on a regular or occasional basis. This is important to note because frequent visitors from Hong Kong typically possess Chinese identification cards, while occasional visitors usually only have Hong Kong resident cards. The PBOC enabled these occasional visitors to open digital yuan accounts to utilize for small transactions, with verification being completed by using a Hong Kong mobile phone number. Short and long-term regulatory considerations of the digital yuan The digital yuan's ability to have varying wallet types based on anti-money laundering/Know-Your-Customer (AML/KYC) compliance regulations may prove problematic for regulators in both the short-term and the long term, especially when examining cross-border interoperability. Varying threats exist on the short-term horizon for the digital yuan in its race to attain first-mover advantage in the CBDC realm, especially as the e-CNY works through its pilot testing phase with a potentially massive deployment in just several weeks. For one, the ability to have different wallet types based on AML/KYC compliance might result in a temporary skew towards smaller wallet creation based on ease of creation, potentially overloading the e-CNY network with domestic and international account creations. A more specific example also includes the establishment of multiple small-level accounts for the purposes of money laundering, thus challenging the PBOC to scale the digital yuan in this short period of time. In the long run, these different wallet types also present challenges to foreign governments and international recipients of the e-CNY. Understanding how the digital yuan's deployment will interface with separate government frameworks is particularly critical for both the PBOC and third-party governments, with the matching of AML/KYC regulations, tax compliance, and other regulatory concerns needing to be addressed between all parties involved in an international digital yuan transaction. Additionally, data privacy concerns remain a significant issue for users of the e-CNY. While the PBOC has vowed to protect personal information and privacy in statements released as recently as , China's history of utilizing legislation such as the to force cooperation with government agencies will prove problematic for potential digital yuan users. July 2021 2017 National Intelligence Law A mix of international data privacy regulations, among other policies, will further add to the already-prevalent data privacy concerns over e-CNY usage. This could ultimately hamper adoption rates in the future, particularly when compared to already-existing digital payments frameworks such as WeChat Pay and AliPay, despite recent encouragement to adopt the digital yuan in . January 2022 Macro-level CBDC concerns for Chinese regulators The usage of the digital yuan as a wholesale instrument to ensure transaction settlement will also be of significant concern for governments around the world. A fully-adopted e-CNY as a wholesale CBDC will give China an increasing advantage on the international stage as a moneylender, particularly when coupled with China's projects in the Belt and Road Initiative, with the yuan seeing higher demand in areas with significant BRI presence. One example of this phenomenon can be seen in the growth of African payments using yuan increasing by 123% over a three-year period. Additionally, China's history of should be looked at with caution when approaching the e-CNY for regular large transaction use. devaluing the yuan The impact of yuan devaluation in CBDC form can be felt instantaneously, given the digital nature of the e-CNY, with macroeconomic effects such as increased demand for lower-priced exports and higher-priced foreign imports benefiting the Chinese economy at the expense of other governments and their respective economies. Additionally, a digital yuan devaluation could even have a significant impact on other currencies, with China's significant trade partners perhaps devaluing their own CBDCs to offset the effects of an e-CNY devaluation. Conclusion In short, it will be interesting to see how the digital yuan progresses in the next several weeks. The impact of the 2022 Winter Olympics and the upcoming Chinese New Year holiday will enable regulators with a better understanding of not only the digital yuan's ability to scale but also with the e-CNY's readiness for international adoption, with a necessary focus on cross-border transactions.

Apple

 Hugh writes about cyberspace, digital currencies, economics, foreign affairs, and technology. 

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CBDC Digital Yuan Deployment To Massively Impact Cross-Border Policy Regulators' Decisions

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