Every morning, Mei Yi waves goodbye to his wife and 3-year-old son and sets off for his finance job in central Beijing, riding into town by public bike share. Like most urban Chinese, the 37-year-old has long abandoned cash and instead pays for his commute—and a lunchtime bite from a convenience store in his office building—with a flash of a QR code on his smartphone screen.
In recent weeks, however, Mei has jettisoned the Alipay mobile-payment app run by Ant Group, an affiliate of e-commerce behemoth Alibaba, for a digital wallet of renminbi (RMB), as China’s currency is called. The wallet is issued as a pilot project by the People’s Bank of China (PBOC), the country’s central bank. “It’s quite convenient to use, but there are no outstanding features to replace mainstream payment systems such as Alipay,” shrugs Mei. “For individuals, at least, any advantages aren’t that obvious.”
Perhaps not. But that tweak in Mei’s daily routine portends a seismic shift in how every person around the world will soon be handling money.
Mei’s digital wallet may lack the snazzy features of the popular payment apps, but in the end such apps are intermediaries, linked to users’ bank accounts. The content of his new wallet is actual legal tender, directly issued to him without the need of any middleman, traditional bank account or paper money to back it up. (To be clear, a digital currency is not the same as a cryptocurrency. While the likes of bitcoin, ripple and ether are largely unregulated—at times vulnerable to hackers, and subject to wild volatility—a digital currency is issued by a government.)
Physical money isn’t going to completely vanish. Although just $5 trillion of the $431 trillion of wealth in the world today is in the form of cash in pockets, safes and bank vaults, no central bank is seriously advocating the complete abolition of bills and coins. What makes digital currencies truly revolutionary are the tremendous new functionalities they offer. It’s the financial equivalent of the leap from postal service to email, or lending library to Internet.
Digital currencies will help governments fight malfeasance, smooth the transfer of assets across borders, and enable central banks to deal directly with citizens—especially helpful in times of crisis. The widespread adoption of such currencies stands to slash the operating expenses of the global financial industry. These amount to over $350 a year each for every human being on earth. Cross-border transaction fees today account for up to 8% of Hong Kong’s GDP, for example—a huge chunk that could be eliminated in a flash.
The SWIFT (Society for Worldwide Interbank Financial Telecommunication) system, which currently governs cross-border transactions between banks, may become obsolete. Depending on regulations, governments could also have direct visibility of financial transactions instead of having to ask banks to provide data. And the world’s 1.7 billion unbanked, including around 14 million U.S. adults, can be helped into the financial system. It’s the biggest change in money since the end of the gold standard.
“You’re going to see a massive transformation of the international monetary system,” says Michael Sung, founding co-director of the Fudan Fanhai Fintech Research Center at Fudan University in Shanghai. Given that the U.S. dollar’s role as the world’s currency may be greatly diminished, Sung also sees “a lot of big geo-political and trade effects too.”
A recent survey by the Bank for International Settlements—a Swiss-based institution that acts as a “central bank for central banks”—indicates that 86% of them are actively researching digital currencies. Some 60% of banks polled are in the testing phase, and although in the U.S., the Federal Reserve is still exploring the concept, European Central Bank President Christine Lagarde says she wants a digital euro by 2025.
According to some estimates, a fifth of the global population will be exposed to a central-bank digital currency within three years. By 2027, some $24 trillion of assets around the world is expected to be in digital form.
China is not the first nation to launch a digital currency—the Bahamas sand dollar was introduced six months before the digital RMB. But it’s perhaps unsurprising that China, the country that invented the banknote in the 7th century, is in the technological forefront.
Although Washington is in no rush to disrupt the traditional international financial system that it dominates, Beijing sees geopolitical gains in helping establish the new protocols. More than 20.8 million people are currently using a digital RMB wallet in China, the PBOC says, and they have made over 70.7 million transactions totaling 34.5 billion RMB ($5.3 billion). The central bank plans to let foreigners use the digital currency in time for the Beijing Winter Olympics in February.
The impetus is coming firmly from the top. China should “actively participate in formulating international rules on digital currency and digital tax to create new competitive advantages,” President Xi Jinping wrote last year in Qiushi, the principal ideological journal of the Chinese Communist Party (CCP).
Although China may be leading the race to roll out a digital currency, the starting pistol was fired in a U.S. boardroom.
In June 2019, Facebook announced it was planning to issue a digital currency—initially dubbed Libra, now called Diem—for its 2.3 billion users. That a private company, servicing almost a third of the global population, was poised to circumvent the existing international monetary system shocked central banks already reeling from the rise of cryptocurrencies. It posed serious questions for the banks’ control over their own countries’ money supply, interest rates, inflation and so on. Libra was “a bit of a wake-up call that this is coming fast,” Federal Reserve Chair Jerome Powell told the House Financial Services Committee last year.
Beijing had been quietly researching the digital RMB since 2014, but the Facebook announcement injected new urgency. Four months later, Xi urged officials at the CCP’s fourth plenum to “seize the opportunities” presented by the blockchain technologies that underpin digital currencies. Today, China is the world leader in terms of the enterprise adoption of blockchain, which may enable digital currencies as they develop.
Of course, Chinese commerce is already largely digitized, thanks to the private duopoly of WeChat and Alipay, which together comprise 96% of all mobile payments in the country. Try to pay for a taxicab in Shanghai or Shenzhen with physical notes, and prepare for dirty looks. But the sway these private firms hold over the domestic economy is a matter of intense discomfort for party officials, underscored by a crackdown that began late last year on Ant Group, which runs Alipay. Regulators scuttled its IPO, levied a record $2.8 billion fine against parent Alibaba and ordered the firm to restructure.
Beijing is also paving the way for state-backed financial competitors. Businesses are free to refuse commercial payment systems—but because digital RMB is legal tender, they are legally obliged to accept it. This empowers China’s big banks to issue their own digital wallets, hopefully creating a multi-polar environment with greater competition, a richer set of services and ultimately greater resilience for the economy.
“There is an important role for the government to play because free-market forces sometimes go overboard,” CEO Piyush Gupta of the commercial bank DBS tells TIME. “To establish a level playing field… policy is quite important.”
In this way, digitization complements other innovations already under way. For years, big banks had a lot of resources but also a reputation for lacking innovation, because it was too easy to make money the traditional way. They had data but no idea how to use it. The rise of online payment providers means they’re now forced to compete, aided by new regulations. In Europe, for example, new “open banking” rules force banks to share their data with third-party companies, which can use it to create new products and services.
Another benefit of digital currencies is financial inclusion. In times of crisis, they enable governments to send aid and stimulus payments directly to the smartphones of affected citizens, regardless of whether the recipients have a bank account.
The pandemic has spotlighted the inadequacies of the current system. As of April 30, 2020, the U.S. government had sent paper coronavirus stimulus checks totaling nearly $1.4 billion to some 1.1 million people who were deceased. Delays were also rife. Knowing the months of waiting many people would suffer before receiving their stimulus checks, in March 2020, Congress considered a proposal to issue every American entitled to financial relief a digital wallet (although it did not pass).
Digital currencies can also be tailored to specific purposes. For example, in the Chinese pilot program, money has an expiration date of a few weeks because authorities are hoping to drive consumption in an economy trying to recover from the pandemic. Cash can be customized for other purposes. If the government is trying to stimulate the hospitality industry in a certain area, for example, it can program money to be used for meals and drinks but not for, say, petrol or power tools. If a hurricane devastates a coastal town, the government can instantly send relief payments to those affected to be spent only on essential supplies.
At the start of the pandemic, around $50 billion of taxpayer money was paid to bail out U.S. airlines and prevent huge layoffs. In reality, $45 billion was spent on buying back stock to artificially prop up share prices and the linked bonuses of executives. Although legislation could have prevented such wanton misuse, digitalization would also enable authorities to microtarget where every cent of every stimulus payment went and what it achieved.
“It’s fundamentally transformative,” says Jason Ekberg, head of corporate and institutional banking practice at management consultancy Oliver Wyman.
Of course, there are drawbacks. Having so much financial information digitized does, by necessity, increase the potential for hacking and cybercrime. “There’s no question that it creates risk,” says Ekberg. “The question is how you can contain and control the risk.”
Neha Narula, the director of the Digital Currency Initiative at MIT Media Lab, agrees. “When we move from analog to the digital realm, that opens up a new set of vulnerabilities that we have to be very careful about and prepare for,” she tells TIME.
Digital currencies could also empower the state to make it impossible to donate to a vocal NGO, for example, or to purchase alcohol on a weekday. That is a special concern in authoritarian systems like China’s, where the potential for social monitoring would be exponentially increased.
Critics have argued that the digital RMB will simply become an extension of the surveillance state. Linked to China’s social credit system, it could see citizens fined in a split second for behaviors deemed undesirable. Dissidents and activists could see their wallets emptied or taken offline. Countries and companies doing business with China could be required to use the digital RMB—giving Beijing an unprecedented storehouse of business data.
Still, those concerns may well be overplayed. In most jurisdictions, it is already impossible to open a bank account without strict ID checks, and large transactions trigger banking scrutiny to root out criminal activity. Digital-currency transactions are also theoretically less monitorable than commercial payment apps because they do not necessarily have to take place over an Internet connection. China intends to allow smaller transactions to take place via “near field communication,” in a not dissimilar fashion to exchanging a file via Bluetooth or AirDrop.
In a June speech, Mu Chang-chun, the director of PBOC’s digital-currency research institute, said there would initially be four classes of digital wallets. The lowest, “anonymous” tier would be linked only to a phone number, with a balance limit of 10,000 RMB ($1,562) and single-payment limit of 2,000 RMB ($312). If you need more, Mu said, “you can upgrade your wallet, upload your valid ID and bank-account information.”
In the U.S., the Fed at present sees no first-mover advantage in disrupting a system it controls. Today, over 60% of all foreign bank reserves, as well as nearly 40% of the world’s debt, is denominated in U.S. dollars. When it comes to digital currencies, it is more important for the U.S. to “get it right than it is to be the first,” Powell said in October.
Narula adds, “It is right to be cautious.” However, given that there are so many pending decisions about exactly how a digital currency might be designed and rolled out, and how it might impact different sectors of the economy, she says, “the U.S. needs to accelerate its research.”
The RMB isn’t poised to usurp the greenback anytime soon. China currently restricts the movement of capital to prevent capital flight and currency fluctuations from undermining its export-reliant economy. Until it stops doing so, international use of the RMB will be limited. And as the U.S. remains the world’s No. 1 economy, a huge proportion of money circulating will remain in dollars. Developing nations will also prefer to retain dollars over erratic domestic currencies.
Still, the dollar’s dominance will not go unchallenged. The rise of digital alternatives may mean the end of the dollar as default currency for developed and wealthy nations. Why, for example, should Chinese loans to Central Asia and Africa be designated in dollars, as they are now?
Digitalization promises to democratize international payments by allowing settlement between currencies without exchanging to the dollar first. In April, JPMorgan, DBS and Singapore’s state-owned investment company Temasek announced the creation of a wholesale digital-currency clearinghouse. Several other proposals are in the works.
Many nations—especially those with testy relations with the U.S., like Russia and China—would also prefer to settle accounts directly via digital currencies. This is not least because the U.S. has increasingly weaponized the dollar for geopolitical gains; it has twice put pressure on the SWIFT banking network to block all transactions with Iran, for example. It is a key reason Beijing has been working hard to establish common global rules for digital currencies. China was the first to contribute digital-currency content to ISO 20022 protocols—a new global standard to cover data transferred between financial institutions, such as payment transactions, credit and debit-card information, and securities trading and settlement information.
Reducing reliance on the U.S. dollar is an explicit goal of many nations developing digital currencies. In a 2019 speech, Mark Carney, governor of the Bank of England, argued that technology could solve the problems of dollar hegemony by allowing the rest of the world, especially developing countries, to win back control over monetary policy. “Any unipolar system is unsuited to a multi-polar world,” he said. “We would do well to think through every opportunity, including those presented by new technologies, to create a more balanced and effective system.”
Fairness also applies to investments. One of the potentials of digital currencies is the acceleration of “tokenization,” or the packaging of value into a form that is instantaneously exchangeable. Global real estate, for example, is worth an estimated $280 trillion. But trading it is extremely difficult, requiring hefty fees, negotiations and red tape.
But what if you could express its value in a token that could just as easily represent a fractional share of a beach house in Thailand, a sapphire in Mumbai or a wine collection in Normandy? Fine art, for example, typically appreciates far more quickly than the stock market. But today it is an investment accessible only to those with a Sotheby’s account and seven figures in the bank. Technology would make it possible to create a digital token that represents a van Gogh or a Picasso, and to sell slivers of art to, say, excited young investors from Manila to Minneapolis.
Cryptocurrencies are already awakening some people to such possibilities, but the universal adoption of digital currencies promises the friction-free exchange of value between investors and consumers of all classes. That, says Sung, “is really the promise of these new technologies in the world of digital finance.” And China, naturally, is proud to be in the vanguard.
“Although the digital RMB is not very popular at the moment, I believe it will be the mainstream payment method in the future,” says coffee merchant Duan Chu, 32, as she enjoys a burrito paid for with the digital currency in downtown Shanghai. “I want to support it as much as I can.”
—With reporting by Leslie Dickstein and Alejandro de la Garza