CBDC At Risk Of Failure? Employees Are Converting It To Cash

CBDCs are a convenient tool for fighting tax evasion, corruption, and crime, but they pose a severe privacy threat. Examples illustrate that ongoing CBDC pilots are not welcome by citizens.

Digital yuan

The Chinese CBDC program may be evolving less smoothly than the Chinese Communist Party would expect it to. "South China Morning Post" (SCMP) has just run a story questioning the viability of the digital currency pilot. According to the outlet, employees paid in CBDC haste to swap it for cash, citing privacy fears, among other issues. Without inherent positive incentives, it may be difficult for the authority to force "surveillance money" on consumers.

The People's Bank of China (PBOC) began research on the digital currency as early as 2014. Five years later, it announced the launch of the digital renminbi, aka digital yuan, aka e-CNY. The currency has been in the pilot phase since April 2021, primarily in large coastal cities. Currently, the CBDC-covered regions include Shanghai, Hainan, Changsha, Xi'an, Qingdao, Dalian, Tianjin, Chongqing, Guangzhou, Fuzhou, Xiamen, and six cities in the province of Zhejiang and more.

The program has been consistently progressing towards an official launch across mainland China. As of now, it has reached 260 million wallets across 25 cities and has been used in various settings, including transit, healthcare, and even purchasing crude oil. China's CBDC program is one of the most extensive in the world, with ongoing optimization efforts and a focus on expanding cross-border applications.

Key CDBC issues: privacy concerns and competition from payment apps

The problem is that Chinese citizens are not eager to embrace it. The SCMP story cites several examples of work environments where employees receive their salaries as an e-CNY balance in a dedicated app. Most of them hastily transfer funds to their regular bank accounts to convert the CDBC to the national currency and be able to withdraw it as cash.

One reason to avoid using the digital yuan directly is the lack of financial incentive – unlike regular money, e-CNY cannot be deposited to yield interest. There are also practical use issues: not many online or offline places accept e-CNY. Privacy is another crucial factor that makes employees reluctant to stick to CBDC.

All payments in digital renminbi are traceable in a state-controlled digital ledger. On the one hand, the CBDC system facilitates fighting crime and corruption. On the other hand, it is a powerful surveillance tool for governments and can easily be abused in authoritarian countries. "Though I myself don't worry much about privacy – online payment is so common that I rarely use cash now – I understand there are people who are concerned about this," says Sammy Lin, an account manager at a state-owned bank that participates in the CBDC pilot.

An interesting aspect of the story is the competition the digital yuan faces from apps that have dominated payment services in China, such as Alipay, WeChat, Tenpay, and Tenpay. According to an unnamed Beijing-based economist quoted by SMCP, these well-established online payment solutions are "a major obstacle to dissemination of the digital yuan."

"The allure of CBDC is fading"

Obviously, it's far too early to call off the CBDC project. Still, the evidence is piling up that the concept has been facing severe challenges worldwide. They are exacerbated by a growing distrust towards surveillance state and the competition from "legitimate" cryptocurrencies – especially since examples from El Salvador and Argentina demonstrate the viability of crypto as a mainstream alternative for national currencies.

Last year, the Kenyan central bank issued a statement announcing that "on the global stage, the allure of CBDCs is fading," and "the implementation of a CBDC in Kenya may not be a compelling priority in the short to medium term."

In Nigeria, the authorities have failed to convince the populace to embrace eNaira, a local instance of the central bank-issued digital currency. Forceful policies led to riots, including attacks on ATMs and road blocks, resulting in what has been described as Nigeria's CBDC failure.

So far, two CBDC projects were canceled due to meager adoption or other issues. For a rough visual breakdown of the current CBDC projects status check the graphics below.

CBDCs worldwide
Source: AtlanticCouncil