The director of digital finance at China’s Peking University has highlighted that the People’s Bank of China may need to closely evaluate the pros and cons of loosening strict capital controls for its digital yuan.
Speaking last Thursday during an online discussion hosted by the South China Morning Post on central bank digital currencies (CBDCs), Huang debated the potential financial risks of internationalizing the yuan. He referred to the technology as a “double-edged sword”.
Beyond the domestic advantages that the central bank is currently promoting in creating a more competitive payments system, there are significant benefits to be derived from the digital yuan. These include money-laundering prevention and enhanced monitoring to help authorities detect economic risks faster. But the technology also allows bad actors to move rapidly.
China’s financial services sector currently remains largely inward-focused, with cross-border money flows restricted by strict capital control measures.
The drawback of internationalizing the e-CNY is that a relaxation in capital controls by using the currency for cross border payments could be destabilizing. In times of financial uncertainty, a digital yuan could facilitate a major outflow of capital away from China.
“You still have to be very gradual because you have to [strike a] balance between the benefits of an open capital account with the risks that come with it,” said Huang.
These discussions about the internationalization of China’s digital yuan have escalated following the publication of a central bank whitepaper last Friday. While China’s markets are already gradually opening up, the digital RMB provides an extra tool.
Though the whitepaper noted that China’s digital currency can be used cross border, it stated that the digital currency is “mainly” designed for domestic use. To combat monetary sovereignty issues and increasing concerns from the US, the whitepaper also detailed its principle of “no detriment”.
Meanwhile, today the Bank of Korea has announced the winner of its CBDC blockchain tender. Earlier this month, the Banque de France also successfully partnered with the Banque Centrale de Tunisie for France’s seventh CBDC wholesale experiment.