E-hryvnia, e-dollar and e-yuan: what are the prospects for digital national currencies?

In January 2021, it became known that the People's Bank of China conducted another successful test of its digital yuan. At this stage, the performance of the Chinese version of DCEP (Digital Currency Electronic Payment) was tested at ATMs in the city of Shenzhen. Central bank customers could cash out their digital yuan money or, conversely, convert cash into digital.  

This experiment was the next step towards the implementation of China's large plan to introduce the digital yuan into circulation, which is scheduled for 2022. Just in time for the start of the Beijing Olympics. In December 2020, the PRC authorities connected the IT giant JD.com to the tests, on whose trading floors they also "tested" e-yuan in Internet transactions. Even earlier, last fall, 50,000 Guangdong residents spent nearly $ 1.5 million in new digital currency in the 3,389 stores that took part in the testing. Judging by the pace taken by China, the goal of introducing the full use of the digital yuan by 2022 will be achieved. But what will the PRC and other countries benefit from the creation of e-money? Let's try to figure it out. 

World in the context of digitalization of currencies 

For several years now, the topic of digital chinas currencies has been discussed at the level of governments and national banks. China, obviously, is in the lead in this marathon and is closest to the creation of a digital national currency. Other countries are also trying to keep up with this trend. Sweden announced its plans to switch to digital, which already uses less than 2% of its cash in its total money turnover. Therefore, for them, the transition to digital money is generally absolutely logical.  

Canada is also preparing for digital currency. More recently, the US Federal Reserve has begun work on creating the digital dollar. Russia this fall presented the concept of the digital ruble. Most countries have already passed the stage of "denial" and moved to the stage of "adoption" of digital currencies.  

Also, the Ministry of Digital Science recently joined the Stella Development Foundation (SDF), a non-profit organization that works in the field of cryptocurrency. Cooperation envisages, first of all, the joint development of the virtual assets market in Ukraine, but also cooperation is planned to create a digital hryvnia. So, we, as a country, are moving in the general track of the trend to create a digital national currency. Although, in my opinion, not fast enough. 

Why do you need digital currency at all?   

For a more complete answer, the following must also be added to this question: "Why are countries no longer satisfied with conventional fiat funds?" First, as the saying goes: "We do it because we can." It seems that it is she who partially illustrates the motivation of Sweden. Now in this country, cash makes up a very small share of the total turnover, and the Swedes are really working hard to completely abandon paper banknotes. Now in Europe they are closest to this. It's funny that it was Sweden that became the first country on the continent to introduce these very paper money into circulation.  But if we talk about the need to introduce digital currencies more broadly, then there are two main directions: economic and political.  

1. Economic direction.  First of all, digital currencies are cheaper than fiat currencies in terms of emission: there is no need to spend money on special paper with watermarks, printing, and other means of protecting banknotes. Although this, of course, is far from the main reason.  

The main advantage is a real acceleration and cheaper payments, which can be carried out with a minimum commission and a minimum number of intermediaries. These factors can not only increase the volume of transactions, but also increase the level of GDP of countries. This is a very urgent problem for many after the coronavirus crisis.  

2. Political direction. From a political point of view, for states, the transition to a digital national currency will be a step towards "de-dollarization" of their economies, as well as greater financial independence. What exactly are we talking about? For example, some country does not want to "shine" its trade deals on the international market, where the rules are dictated by the dollar. The reasons for this secrecy can be different: from international sanctions, under which the state may be, to a trade war (this is me about the case of China and the United States, if that). Having their own digital currency, which other countries cannot track, frees their hands. You can trade with partners who will not be afraid to get "banned" for cooperation with unwanted countries.  

Digital currencies for "internal use" 

In addition to foreign policy, digital national currencies also solve many internal problems. Since the state controls the digital currency, it receives the most complete information about the finances of its citizens and can track the movement of each currency. For the state, one of the motivators to develop and introduce electronic currency is also to simplify the collection of taxes from citizens. According to some forecasts, the state “figure” due to its centralization makes it possible to ensure almost 100% collection of all taxes.  

The good news is that it works the other way too. For example, for targeted assistance to the population. It will be able to receive exactly those people who really need it. Again, due to the availability of information about funds in the accounts of citizens. Also, digital currencies will have a significant impact on corruption: regulatory authorities will be able to see how much exactly was spent on the construction of an object, and how much went into the pocket of a corrupt official or his entourage.  

What are the main dangers of digitalization of national currencies? 

Over the past few years, we have seen how the tone of central banks in different countries in relation to digital currencies has changed from negative to more positive. But skeptics still have a high level of mistrust towards them. They say that the main reason for their dislike of digital is the lack of security of electronic wallets that ordinary citizens will use. Technologically, the wallets themselves are supposed to be hardware wallets. Simply put, they will be stored together with e-money directly on the smartphone. But threats do exist. For example, a fraudster, if he works directly inside the system, can gain access to registries and try to steal funds. Or the person's phone will be physically stolen and money will be withdrawn from him. That, however, is now a very real situation even without the introduction of electronic money.  

But more often than not, in my opinion, the cause of deception will still be social engineering. And there is one big reason for that - the general level of technical literacy in society remains at an insufficient level. It is the ignorance and ignorance of people that untie the hands of all sorts of fraudsters who are guaranteed to use various methods to lure money out of their victims. Obviously, all possible approaches will be used: from the simple and obvious to the most creative.  

Here, countries that integrate digital national currencies will have to pay special attention to informing their citizens about the rules for using electronic money and raising the general level of technical literacy of people. 

Adapting legislation to new realities will also help protect against fraudsters. If the fraudsters are guaranteed to receive punishment, and the stolen funds are returned to the owners (fortunately, the centralization of the currency allows them to be easily tracked), then the scam will be significantly less.   

In addition to security problems, there remains the question of implementing the technical infrastructure necessary for the circulation of digital currency. There are two ways in front of the central banks. The first is to transfer all payment functions to intermediaries: fintech companies and commercial banks, while remaining as a regulator themselves. But in this case, the functionality of the central bank will be significantly limited. Central banks understand this, and therefore perceive this option without much enthusiasm.  

The second way is to become a technological tool yourself that will independently provide all the infrastructure needs for the adequate operation of the digital currency. However, for this it is necessary to prepare not only "hardware", but also a staff of highly qualified employees who will support the operation of the entire system. And this is really a very serious challenge for the Central Bank in many countries. You need to understand that banking infrastructure is a very traditional and not particularly mobile sphere. To adapt it to the new conditions is, of course, an ambitious task, but at the same time very laborious.  

However, the coronavirus pandemic has greatly accelerated this process. According to research, the number of public statements from CBDC representatives about CBDC has increased during the epidemic. In addition, many people have realized the dangers of cash, which can carry the virus, and are increasingly switching to contactless payments. And if earlier the real mass launch of digital currencies was a matter of the next 5 years, then due to the coronavirus, this period was reduced to 2-3 years. And with their arrival in everyday life, we will all witness how much the global financial system will change.  

Source: Business Diary Philippines