Report: The Rise of the Chinese Digital Yuan and the Challenge to the Global Financial System
- Gabriele Iuvinale
- 19 giu
- Tempo di lettura: 17 min
by Gabriele and Nicola Iuvinale, Senior China Fellows at Extrema Ratio
The report analyzes China's strategic move to establish an international operations center for the digital yuan (e-CNY), highlighting its ambitious plan to internationalize the digital currency. This center, located in Shanghai, aims to promote financial services and fintech innovation by serving as a hub for international collaborations and new applications. The initiative is part of a larger geopolitical and geoeconomic context, with Beijing aiming to challenge the hegemony of the U.S. dollar and offer an alternative to circumvent potential international sanctions, although full success will take time and global trust. The e-CNY, already well advanced in domestic adoption with millions of users and transactions, is conceived as a tool to strengthen state control over financial data and shape global standards for digital finance. Projects such as mBridge demonstrate the intent to facilitate faster and cheaper cross-border payments through CBDC, and China is already promoting the use of the digital yuan in energy transactions with key partners. Western powers, concerned about privacy implications and digital authoritarianism, are considering countermeasures.
Introduction
China has announced the establishment of an international operations center for the digital yuan, a significant move that testifies to the country's ambition to promote the internationalization of its digital currency and strengthen its position in the global financial landscape. The announcement, made by Bank of China Governor Pan Gongsheng at the Lujiazui Forum in Shanghai, highlights Shanghai's centrality as a strategic financial hub for Beijing.
Objectives and Operation of the International Center
The main purpose of this center, as stated by Pan Gongsheng, is twofold: to promote the internationalization of the digital yuan and to foster the development of financial market services while supporting innovation in digital finance. Although specific details on the exact composition and operation of the center have not been fully disclosed, it is reasonable to assume that it will serve as a key platform for:
Infrastructure and Standards Development: The center could be responsible for developing and implementing technology infrastructure and operational standards that facilitate the adoption and use of the digital yuan internationally, including interoperability protocols with other payment systems and digital currencies.
Infrastructure and Standards Development: The center could be responsible for developing and implementing technology infrastructure and operational standards that facilitate the adoption and use of the digital yuan internationally, including interoperability protocols with other payment systems and digital currencies.
Services for Foreign Enterprises and Institutions: Could offer dedicated services to foreign enterprises and financial institutions interested in using the digital yuan for payments, trade and investment, including technical assistance, advice and regulatory support.
Research and Development: It will likely be a hub for research and development of new applications and technologies related to the digital yuan, including blockchain-based financial services.
Further Measures in Shanghai and Beyond
The opening of the International Digital Yuan Center is just one of eight strategic measures announced in Shanghai that demonstrate China's commitment to strengthening its financial system and promoting economic openness. Other notable initiatives include:
Interbank Market Transaction Reporting Archive: This archive will be critical for collecting and analyzing data on transactions in various submarkets (bonds, currencies, derivatives), providing crucial information for macroeconomic policy formulation and financial market supervision.
Personal Credit History Assessment Agency: This agency aims to improve the country's social credit system by providing financial institutions with tools to offer more diversified and customized credit products.
Offshore Trade Financial Services Pilot Program (Lingang): The Lingang area of the Shanghai Pilot Free Trade Zone will be a test bed for comprehensive reforms in offshore trade financial services, supporting the development of cross-border trade with innovative business rules.
Offshore Free Trade Bonds and Simplified Free Trade Accounts: These measures aim to expand financing channels for businesses and facilitate cross-border trade and investment.
Structural Monetary Policy Instruments and Yuan/Foreign Currency Futures Trading: The introduction of new monetary policy instruments and the promotion of yuan and foreign currency futures trading in Shanghai underscore the intent to strengthen the role of the yuan in international financial markets.
Geopolitical and Geoeconomic Context: The Challenge to the Dollar and International Sanctions
The establishment of an international operations center for the digital yuan cannot be separated from the broader geopolitical and geoeconomic context, particularly the growing competition between China and the United States and the implications of international sanctions.
The Challenge to Dollar Hegemony: For decades, the U.S. dollar has dominated the global financial system as the predominant reserve and trading currency. China, through the digital yuan, aims to offer a credible alternative, reducing its own and other countries' dependence on the dollar. An internationalized digital yuan could facilitate trade and direct investment in yuan, potentially bypassing the dollar-based payments system.
An Escape Route from International Sanctions? The issue of international sanctions is a key factor. Countries under U.S. or Western sanctions could find in the digital yuan a means to conduct financial transactions outside the reach of traditional payment systems, which are heavily influenced by the United States. Although China has always maintained that it does not want to facilitate sanctions violations, a non-dollar-dependent payments system inherently offers greater autonomy. This is of particular interest to countries with strained relations with the United States.
Timing and Feasibility: The timeline for the effective internationalization of the digital yuan and its ability to significantly challenge the dollar is a matter of debate. The process will be gradual and will require not only technological development but also building trust and acceptance by a wide range of global players. Challenges include transparency, governance, privacy protection, and compatibility with international regulatory frameworks. Success will also depend on China's ability to build financial alliances and promote large-scale adoption.
The Digital Yuan (e-CNY): An Evolving Strategic Project
China is already in the midst of digitizing its entire economy and its digital state currency, the e-CNY. For years, these projects were only an internal topic of discussion within the Communist Party of China (CPC), but now they have become a tangible reality.
In July 2021, the People's Bank of China (PBOC) outlined progress in the development of the e-CNY, revealing how the CCP is introducing new financial technology (fintech) into China's huge economy. Chinese financial and technology companies are innovating, building new applications on the e-CNY architecture to carry out faster and more dynamic financial transactions. The CCP's national fintech strategy highlights how the private sector is collaborating to make China's currency even "smarter."
Although e-CNY is primarily a domestic issue, it is highly likely that this policy will have an impact on foreign policy as well, as China is pushing the rest of the world to follow its technological path. Beijing's focus on fintech is a geopolitical move in a global race where the nation with the best big data will win. Should the global digital economy evolve, following Chinese technological innovation, this will give the CCP significantly more bargaining power in international trade.
While Western policy discussions on technology and data tend to focus on privacy protection, the CCP sees and exploits data as a pillar of the national infrastructure. In 2017, President Xi Jinping called data "a new factor of production, a fundamental and strategic resource [...] needed to build a digital economy." The Chinese government aims to use digital information to power the infrastructure and applications that govern daily life, allowing the state to use it for political and economic purposes, thus reinforcing the CCP's digital authoritarianism. The e-CNY is a CCP tool to collect every byte of financial data, aggregate it, analyze it, and exploit it to build a stronger economic and political apparatus. As the world economy becomes more digitized, innovation will come through the interpretation of aggregated data so as to also gain an advantage in global economic competition.
Progress and Adoption of the e-CNY
The Chinese market has had digital and mobile payments for years, but the e-CNY represents a distinctly different development. It allows users to directly hold a central bank-issued digital asset that can be transferred between different banking and payment platforms. The e-CNY had a pilot phase in April 2020. To incentivize citizens to use it, the government launched initiatives such as lotteries, offering digital yuan to be spent on daily expenses. The stated goal of the Chinese government is to eliminate cash use to address problems like tax evasion, money laundering, corruption, and to ensure greater monetary stability.
In early 2021, the CPC offered randomly selected citizens small amounts of free e-CNY to spend online or via wallet apps. By the end of June 2021, approximately 21 million people and 4 million businesses had e-CNY wallets and had conducted about 71 million transactions totaling $5.3 billion in digital renminbi. Although the numbers were still small compared to the entire economy, they provided the Chinese government with "real" and concrete data. On January 5, 2022, the day after the Chinese central bank launched an e-CNY wallet, it became the most downloaded app on the Apple iOS Store. Within the first two weeks, 261 million users had installed the app, although only 12 pilot locations were currently able to use that wallet.
By February 2022, e-CNY transactions worth over 87.5 billion yuan (US$13.78 billion) had been made. Furthermore, by November 2021, over 10 million corporate wallets had been created. Millions of retailers across China are adopting payment systems that accept the currency, and giants like Huawei have even pre-installed an e-CNY wallet in their Mate 40 smartphone line, boosting digital yuan adoption in new markets. With over 100 million Chinese consumers already using this currency, the e-CNY has already crossed borders.
Internationalization and Challenging the Dominant System
Even if a digital renminbi cannot, in the short term, directly compete with the more stable and globally attractive US dollar, the functionality of the digital currency could drive Beijing-led innovation within the global financial system. China's long-term strategy in the digital-economic sector includes creating a "benchmark standard" in emerging digital technologies, which no country, not even the United States, is currently dominating.
China is daily intensifying its fintech projects and, at the same time, gaining increasing influence in shaping international political discourse. Beijing could end up "unilaterally" deciding the rules of new global financial practices and see its digital technologies adopted internationally, making Chinese fintech more important for global trade and, therefore, giving the Beijing government greater international leverage. According to some actors, regimes like the Chinese and Russian ones "are seeking to rewrite the rules underlying our international systems and technological development, and its standardization gives them the ability to do so."
In-depth on mBridge: Building a Bridge for Cross-Border Payments with CBDCs
The mBridge (Multiple Central Bank Digital Currency Bridge) project represents one of the most advanced and significant global efforts for the use of Central Bank Digital Currencies (CBDCs) in cross-border payments. Led by the BIS Innovation Hub (the innovation center of the Bank for International Settlements), in collaboration with the Bank of Thailand, the Central Bank of the United Arab Emirates, the Digital Currency Institute of the People's Bank of China, and the Hong Kong Monetary Authority (HKMA), mBridge is a pioneering initiative aimed at revolutionizing how international payments occur.
How mBridge Works
mBridge is a platform based on a new blockchain, the so-called mBridge Ledger, designed to support real-time, peer-to-peer payments and exchange transactions between different central bank digital currencies. The architecture provides that each participating central bank (or monetary authority) has a validator node on the platform, while commercial banks in their respective countries can connect to this node to conduct transactions.
The operating mechanism of mBridge aims to overcome the pain points of the current cross-border payment system, which often suffers from:
High Costs: Fees for international transactions can be significant.
Low Speed: Payments can take days to complete due to the complexity of the chain of intermediaries (correspondent banks).
Operational Complexity: The need for multiple intermediaries and duplicated controls increases complexity and risk.
With mBridge, on the other hand, payments aim to be:
Faster: The goal is near-instantaneous settlement, in a few seconds. In 2022, a pilot demonstrated that 164 payment and currency exchange transactions, totaling over US$22 million, were processed in approximately six weeks, highlighting the potential for significantly higher speed compared to traditional channels. The latest news (January 2025) indicates that the project has demonstrated the ability to process payments with transaction times under 10 seconds and cost savings of up to 85% compared to traditional correspondent banking, with a pilot transaction volume exceeding $50 billion in 2024.
More Secure: Settlement occurs directly in central bank money, the safest form of currency.
More Accessible: Intermediaries are reduced, allowing direct connectivity between participating banks.
Cheaper: Lower settlement risk and fewer duplicated processes lead to overall cost reduction.
News and Recent Developments of mBridge
Achievement of MVP (Minimum Viable Product) Phase: In mid-2024, the mBridge project reached the Minimum Viable Product (MVP) phase. This means that a basic version of the platform, with sufficient functionality to be used and tested by an initial group of participants, has been launched. The goal is to gather continuous feedback for further iterative improvements before full implementation.
New Participants: In June 2024, the Saudi Central Bank joined mBridge as a full participant. This is a significant step, given Saudi Arabia's role in the global energy market. Additionally, the project has over 31 observer members, including the Reserve Bank of India, a sign of growing global interest.
Compatibility and Testbed: The MVP platform is compatible with the Ethereum Virtual Machine (EVM), making it an ideal "testbed" for additional technological solutions, new use cases, and interoperability with other platforms.
Private Sector Involvement: Private sector companies are actively invited to propose solutions and use cases to further develop the platform. During the 2022 pilot phase, 20 commercial banks from the four participating jurisdictions used mBridge to conduct real transactions.
Specific Use Cases: Several potential use cases have been identified, including cross-border insurance payments, atomic settlement of FX transactions, real-time cross-border trade payments, programmable trade finance, and supply chain finance.
China's Role (e-CNY): For China, mBridge serves multiple strategic objectives. The platform is directly connected to the domestic e-CNY system, reducing friction in cross-border payments involving the digital yuan. This is crucial for Beijing's goal of increasing the use of the renminbi in global trade payments, aligning it more closely with China's share of world trade. While explicit mention of "CBDC" is sometimes avoided in bilateral agreements for political reasons, the underlying technology and goals of mBridge are clear. The participation of the PBOC's Digital Currency Institute highlights China's leadership role in mBridge's technological development.
Local Currency Transactions: Some mBridge participants, such as China and Thailand, have signed agreements to facilitate bilateral local currency transactions, even if the CBDC is not always explicitly mentioned. However, the mBridge project creates a means to facilitate such transactions more efficiently. Pilot transactions have been reported where the UAE received payments in e-CNY and subsequently used mBridge to send Dirhams to China, demonstrating bidirectional functionality.
The Role of the Digital Yuan in Recent Geopolitical Transactions
Letters of credit are issued and enforced by banks, but one based on e-CNY, running on a Chinese trade finance platform, would likely complicate traditional banking processes. This is because not only would the platform itself be managed in China, but transaction data related to e-CNY would be directly made available to the Chinese government. These agreements could also bypass state controls based on conventional letters of credit through current banking processes.
For example, mBridge, by creating an alternative means of international exchange, would make it more difficult for the West to impose economic sanctions and investigate crime. The current dollar-based international exchange system relies on a global network of connected banks and a set of communications known as SWIFT. Since the United States and its allies dominate this system (a "hub-and-spoke" infrastructure where most hubs depend on a presence in the West), they are able to impose sanctions and monitor money laundering and other crimes. Any bank that does not diligently comply with Western demands risks being cut off from the system, with potentially significant business implications. As an encrypted and opaque channel outside Western jurisdictions, mBridge presents itself as an alternative solution.
In the short term, China could also use the currency and related infrastructures to circumvent U.S. sanctions. A direct blockchain-based currency link could facilitate trade and support in places like Iran, Venezuela, and North Korea. It would also alleviate sanction pressure on Russia, which has been divesting its USD reserves for years.
In this regard, China is actively promoting the use of the yuan, including the digital yuan, in commodity transactions:
Oil and Gas: Major oil suppliers to China, such as Russia, Angola, Venezuela, Iran, and Nigeria, now accept yuan for payments. The 2017 Chinese World Energy Development Report also proposed the concept of "yuan-gas." Given the fragmented nature of global natural gas markets and China's leverage as a major buyer, the emergence of a yuan-gas is not an unrealistic dream. Russia, Iran, and China collectively produce more liquefied natural gas (LNG) than the United States and all have non-dollar financial infrastructures.
Cross-Border Interbank Payment System (CIPS): Another component of a Chinese-initiated financial system is the PBOC's Cross-Border Interbank Payment System (CIPS), which can be implemented through the digital yuan. Launched in 2015, CIPS has become a financial infrastructure that could allow sanctioned entities to enter global markets. CIPS combines financial messaging services and settlement functions on a single platform. It is the Chinese alternative to the "SWIFT + CHIPS" (Society for Worldwide Interbank Financial Telecommunications and Clearing House Interbank Payments System) combination that moves dollars between different institutions globally.
Yuan Liquidity Reserve Pool: China's plan to establish a yuan liquidity reserve pool with the Bank for International Settlements could help promote the international use of the currency. According to analysts, this plan, in addition to Indonesia, Malaysia, Hong Kong, Singapore, and Chile, could pave the way for the currency's anchor role in the Asia-Pacific region. The announcement highlights the Chinese central bank's effort to implement infrastructures that help reduce dollar hegemony.
The Chinese Vision and Western Concerns
The CPC is not only distributing electronic money to citizens; it is overseeing a growing digital renminbi ecosystem. It appears that, at each step, payment would be verified for tax purposes. It is unclear whether the process would automatically report data to tax authorities, but given the CPC's objective of developing a national government database of digital transactions, it seems likely that this information would go directly to the government. Equipped with this surveillance capability, the Communist Party can further deepen its political control over Chinese society. This innovation, therefore, will strengthen the CPC's digital authoritarianism. The digital renminbi is a tool for the CPC to collect every byte of financial data to aggregate, analyze, and leverage it to build a stronger economic and political apparatus. As the world economy becomes more digitized, innovation will come through the interpretation of aggregated data, thus gaining an advantage in global economic competition.
In 2020, China committed to spending $1.4 trillion on "next-generation" digital infrastructure by 2025; a project for the development of the digital economy that aims to increase the contribution of key industries in the sector to 10% of GDP by 2025. In October 2021, Li Lihui, head of the Blockchain Research Working Group at the National Internet Finance Association of China and former president of the Bank of China, stated: "China's central bank digital currency experiments lead the world and should strive for a dominant position in the process of digital currency globalization." Among his priorities, Lihui mentioned the use of digital currency to clear payments from international financial institutions, and the construction of an international digital financial and wealth center.
The CPC has grasped the importance of this economic calculation. It is also probable that the Beijing government will transfer foreign and domestic data to Chinese companies to offer them competitive advantages. Most countries studying ways to digitize their economies should set the rules in developing technological and political standards that reinforce economic innovation and prosperity without promoting authoritarianism. So far, however, only research papers and theories are being produced on state digital currencies, while China already has real-world data to study, provided by millions of companies and consumers.
Beijing has recently definitively banned cryptocurrencies, instead introducing a state-led version firmly under government control. Chinese leaders are also seeking to prepare their economy to withstand the heavy economic blow caused by an already ongoing forced decoupling. These concerns are not new: they advocated for the reform of the global financial system immediately after the Asian financial crisis in the late 1990s, seeking to protect themselves from the hegemony of the US dollar. In 1999, Dai Xianglong, then governor of the People's Bank of China (PBOC), stated that the existing global financial system "must be reformed" because "the role of international reserve currency, played by the national currency of some countries, has been one of the main sources of instability."
In June 2020, Hong Kong's South China Morning Post reported that Fang Xinghai, vice chairman of the China Securities Regulatory Commission, stated that because China relies primarily on the US dollar payment system in international transactions, it would be vulnerable to possible sanctions from the United States. In July 2022, at a forum organized by Caixin, Fang Xinghai declared: "Something like this has already happened to many companies and financial institutions in Russia, and we must prevent it early and make real preparations, not just mental preparation." Fang Xinghai's comments came as the U.S. Congress was considering using the fundamental role of the US dollar in international payments to "punish" Chinese individuals, companies, and financial institutions on issues such as Hong Kong. Fang added that for a long time the United States has held an absolute dominant position in the global monetary system, thereby establishing the strong position of the US dollar and controlling international payment and settlement infrastructures. The US dollar accounts for over 60% of global foreign exchange reserves and 90% of international capital transactions. Fang Xinghai highlighted how the United States controls the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and the New York Clearing House Interbank Payment System (CHIPS).
Fang Xinghai's observations show that Chinese policymakers see possible U.S. financial sanctions as a real risk. Fang stated: "the internationalization of the renminbi is a topic that must be planned in advance and cannot be avoided when facing external financial pressures in the future, and the promotion of renminbi internationalization should be accelerated in the next 10 years." He highlighted that if the internationalization of the renminbi can make further progress, China's ability to resist financial "decoupling" will be significantly improved for three reasons:
The Chinese government and citizens hold an enormous amount of assets abroad, most of which are in US dollars. Under the guidance of the Federal Reserve's current monetary policy, the value of US dollar assets faces great uncertainty.
China's monetary policy, financial opening, and financial development are all influenced by the global monetary and financial system. In the Federal Reserve's current monetary policy, if the global monetary and financial system were to face great uncertainty and many risks, it would be a matter that should be thoroughly considered.
Most Chinese financial institutions and various businesses and entities conduct international business primarily relying on the US dollar payment system, and this causes much concern, because U.S. financial sanctions would be a double-edged sword. On the one hand, the United States can unilaterally use financial sanctions without UN resolutions by virtue of their national laws, so financial sanctions would be asymmetric powers with strong unilateralism. At the same time, the phrase "kill a thousand enemies and destroy eight hundred of your own" is recalled, indicating that sanctions and counter-sanctions coexist with risks. Furthermore, according to Fang, if the United States frequently used financial sanction weapons, it would create more "centrifugal force," which would directly accelerate the global trend towards "US de-dollarization." Finally, the effectiveness of financial sanctions would be limited by other factors, such as the economic size and structure of the sanctioned target.
The Hoover Institution, in its 2022 report, also underlines how the e-CNY could, ultimately, "undermine the traditional dominance of the U.S. dollar as the dominant reserve currency and source of geostrategic influence. The decline in the U.S. dollar's power would also diminish a key tool in the American national security playbook: the ability to deploy crippling sanctions against rogue states and human rights violators."
The United States and the European Union, along with allied states, should step forward to lead the development of an international regulatory framework on digital currencies, including CBDCs, that prioritizes consumer protection, privacy, financial compliance against crime, financial stability, and the protection of monetary sovereignty. In May 2022, U.S. Senators Tom Cotton, Marco Rubio, and Mike Braun introduced a bill to prohibit companies that own or control app stores from selling apps in the United States that support or enable e-CNY transactions. The move came after WeChat, a messaging and payment application owned by China's Tencent with over 1.2 billion users, announced it would start supporting that currency in early 2022. Alipay, the immensely popular payment app owned by Jack Ma's Ant Group, also accepts the digital currency. Both apps are available in the Apple and Google app stores.
Let us not forget that the structuring of a fair international monetary system is the indispensable prerequisite for the normalization of global political and economic balances. Since the topic, while of fundamental importance, constitutes a purely technical aspect of economic policy, it must first be clarified that it presupposes, upstream, a discourse that must necessarily touch upon essential aspects of rationality, ethics, and culture, because, otherwise, the monetary instrument "runs wild" in the hands of those who use it and is no longer a tool at the service of the community, but conversely a serious threat to the fundamental freedoms of peoples themselves. When astounding terms enter common parlance, public opinion loses awareness of their meaning and adapts to accepting even absolutely extraordinary events as normal facts. Without careful and consequent awareness of what is at stake, the world could evolve into a digital economy with the characteristics desired and controlled by the Chinese Communist Party.
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