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Issue Brief April 6, 2021

The digital Yuan, digital Euro, and the Diem: Key issues for public debate

By Hung Tran

As momentum grows globally for the development of central bank digital currencies (CBDCs), it will be important to watch what the two of the most prominent players in the field, the People’s Bank of China (PBOC) and the European Central Bank (ECB), are doing. The digital yuan and digital euro have similarities but also diverge in certain respects. The PBOC has stated that if successful, the digital yuan could fully replace physical cash, while the ECB maintains that the digital euro would only complement physical cash. Both banks are looking to adopt a two-tiered system that will not be reliant on distributed ledger technology but will allow their digital currencies to be interoperable with existing digital payment services, such as AliPay or WePay in China. Both the digital euro and yuan would be stored in digital wallets which would be accessed through apps that users can download. Once implemented, the technological properties of CBDCs and digital wallets allow CBs to have a remunerative policy on CBDC holdings, something not possible with bank notes and coins. In addition, digital currencies would increase access to payments in their respective populations, especially in unbanked segments. 

However, questions still remain surrounding the legal, political, and regulatory properties of CBDCs. These include: 1) the challenges CBDCs pose to bank intermediation and financial stability; 2) questions of anonymity regarding holding and transacting in a digital currency; 3) the continued presence or eventual absence of physical currencies and its impact on if central banks can impose negative nominal interest rates on CBDC holdings; and 4) the the forms and extent to which capital controls should be implemented to prevent capital flight.  

In addition to CBDCs, privately developed digital currencies like the Diem are also in play.  Diem uses a distributed ledge technology and has base currencies which it uses to guarantee conversions, thus solidifying its stability against other cryptocurrencies like Bitcoin. However, with the advent of CBDCs, the question must also be raised regarding the feasibility of digital currencies like the Diem in attracting widespread use.  

A Digital Euro

A digital euro project is imminent, while the US has yet to officially launch their digital dollar project. Senior Fellow Marc-Olivier Strauss-Kahn asks and answers three important questions: What, why and how?

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Image: The European Central Bank (ECB) headquarters is pictured during sunset as the spread of the coronavirus disease (COVID-19) continues in Frankfurt, Germany, March 21, 2021. REUTERS/Kai Pfaffenbach