April 24, 2023

China and CBDCs - The opportunity to make Europe stronger

In the context of the threat posed by central bank-issued digital currencies (CBDCs) to traditional economies based on physical currency, I have been reflecting these days that, really, for Europe it is a very important opportunity to socially reinforce the vision of a more united state.

On the one hand, the adoption of CBDCs, at a global level, is a phenomenon that cannot be avoided. There are too many elements at stake at the geopolitical and geoeconomic level. It is true that, like all revolutions, there will be moments of instability, financial in this case, and, as a direct consequence, social. The introduction of a digital currency will change the way central banks operate, as they will have to adapt their policies to ensure financial stability and avoid inflation. Its appearance is going to have an impact on the money supply and the speed of execution of international financial transactions, which in turn causes new storms in monetary policy. We are beginning to experience it as light storms and the hurricane has not yet begun. Another important aspect to consider is the impact that the adoption of CBDCs could have on the financial privacy of users, who are always jealous of their privacy, and who, in certain circles, are even more cautious if possible. As CBDCs become more popular, there is a risk that users’ personal and financial data will be collected and used by central banks or authorized third parties. And, clearly, this could have significant implications for financial privacy and data security contrary to the regulations that have been set by various entities, especially in Europe.

In addition, the adoption of CBDCs could have implications for competition in the electronic payments market. As CBDCs become more popular, they will be able to compete with other electronic payment methods, such as credit and debit cards and online payment services. It is not surprising that giants such as Visa and MasterCard have already begun to maneuver in this direction. Or even that large financial groups such as JP Morgan, Chase Manhattan, HSBC, Barclays or Santander are immersed in the creation of various digital payment interchange companies. However, there are hopeful points for the adoption of CBDCs: it could also have implications for financial inclusion as already noted with the introduction of cryptocurrencies such as Bitcoin, since in some parts of the world, lack of access to banking and financial services is a major problem. In that context, the adoption of CBDC-based money could improve financial inclusion by providing a digital means of payment accessible to more people with a certain stability not seen today in cryptocurrencies. Although I don’t think this is the most important aspect that is marking the strategy of central banks to avoid risks and maximize the potential benefits of CBDC adoption.

I am interested in framing and seeing in this economic and political game that has begun, the latest moves made by China. On the one hand, the experiment of introducing its Digital Reminbi, the e-Yuan, along with its increasingly noticeable overwhelming influence over emerging continents, i.e. Africa, Latin America and Southeast Asia. I see geostrategic implications from an economic point of view. Firstly, because it will alter the role played by national currencies such as the Euro and mainly the Dollar in international trade and foreign investment. The recent announcement that Russia is joining this currency, to provoke a massive de-dollarization of world trade between a giant like China and them, but with the complicity of those continents, automatically provokes a game of brutal economic interest on traditional currencies. It is in this context of instability where I see that, in the short term, a value such as gold or Bitcoin, may have a niche to protect investments. Not to speculate but to protect, although after the subsequent stabilization, the eYuan will be the big winner in the world economy led by China, becoming a global reserve currency, displacing other currencies, such as the US dollar or the euro, and reducing the economic and political power of the countries that depend on those currencies.

If this adoption by multiple states of a currency such as the eYuan, based on a CBDC, occurs, it may be necessary to develop new international norms and standards to guarantee financial stability and prevent tax evasion and money laundering. And on the other hand, it could have implications for economic competition between countries. Countries that join or adopt these CBDCs before others could gain a competitive advantage in global markets, international trade and foreign investment by enabling faster and cheaper transactions. China’s adoption of a CBDC could have significant economic implications for European states and other countries around the world, especially if China becomes a dominant economic power that uses its digital currency to influence trade and investment globally. In this context, European states could consider different options to counter China’s influence. One option would be to accelerate the operation of their own digital currency, the €uroDigital, to compete directly with the Chinese digital currency. However, if countries do not agree, this will not be achieved in time because it requires both a large investment in technology and resources (and it is not enough to have launched the activation of the financial Sandbox) and to develop an efficient and secure platform and to carry out a proper change management with citizens. In making more Europe just when what we are seeing is the opposite, a rise of nationalism and the search for individuality. European states could also consider strengthening economic cooperation with other countries and regions, such as Latin America, Africa and Asia, to diversify their trade and investment and reduce their dependence on China. But it seems complicated to build these bridges in countries with which we have historically only seen, in my opinion, as sources of business rather than true allies and fellow travelers.

In conclusion, there are difficult times ahead. Not only for the crypto-economy world but also for the “realeconomy” with the increasingly strong irruption of a strongly controlled economy such as China and its eYuan.

Juan Luis Gozalo.