TL;DR: the reasons for why Chinese leadership will be likely to make a concerted push for Central Bank Digital Currency (CBDC) usage for international trade are as follows:

1. Further Internationalize the CNY/HKD - The world’s existing financial rails are clunky and slow, especially for those that are not using the world’s major currencies. CBDCs can technologically improve upon the existing financial rails. Chinese currency can serve as an anchor for bilateral trading relationships with many countries, particularly in the Global South, where China is overwhelmingly the largest trading partner. It won’t kill the dollar by any stretch of the imagination, but it can hasten the erosion of the USD’s complete dominance.

2. Sanctions Insulation - Multilateral wholesale CBDC networks are building out a set of new financial rails. China has been the leading voice on projects such as Project mBridge, which seeks to create a CBDC network that involves sovereign control for every country’s “partition” of the mCBDC platform. 

   1. That means, in short, China has control over Chinese firms and Chinese currency, etc. It also means the US and friends cannot just unilaterally shut off the financial plumbing between China and a 3rd party country in a way they currently can with Swift.

   2. This is a very useful consideration for mitigating the impact of engaging in activities that might otherwise generate sanctions. Any decisions that may be the subject of Western sanctions would still obviously be political in nature, but a developed mCBDC rails system might be enough breathing room to continue trading with non-aligned countries with near business-as-usual cadence.

3. Strengthen the BRI Relationship 

   1. Beyond the other benefits, this may also help with some of the corruption issues that have occurred in the BRI. The BRI, like any program that large, is going to have issues around corruption. CBDCs can provide a trace of where funds are going, hopefully alleviating some of the graft that occurs today.

I believe $50bn in eCNY CBDC trade will be accomplished by 2028 given the current progress of China’s international CBDC consortia, and because how little $50bn is in comparison to the overall China trade pie.

Bio: Will, 24, has a fascination where technology, economics, public policy, and international relations meet. He is currently a Product Manager at a tokenization startup (which does sell white-label CBDC products) that is building the next generation of money for commercial and central banks. Will graduated from Tsinghua University with a Master’s in Global Affairs, and from Lehigh University with an M.S. in Computer Science and a B.S. in Computer Science and Business. When not working or writing prediction essays, Will enjoys reading, watching movies, and being too online for his own good.

These views are my own and do not reflect the views of any associated institutions.

Central Bank Digital Currencies are my vote for the under-the-radar economics story of the past few years, and have significant operational implications for international trade – especially for China. I predict with 95% likelihood that China will utilize their wholesale CBDC to further internationalize the eCNY, accounting for >$50bn USD of international trade by 2028.

Central Bank Digital Currencies (CBDCs) are an electronic form of fiat currency (e.g., USD, EUR, CNY), with the Atlantic Council’s CBDC Tracker showing that over 100+ jurisdictions are on some level of experimenting with CBDCs (“Central Bank Digital Currency Tracker,” 2024). As you look at the map, you’ll find that most progress towards CBDCs is concentrated in either small or emerging markets, with the only truly live CBDCs being the Bahamas, the Eastern Caribbean Currency Union, Jamaica, and Nigeria (Adrian et al., 2023).

The benefits of CBDCs are clear if rather mundane: increased operational efficiency – reduced settlement times/delays, streamlined workflows, greater visibility into payments, etc. – and improved financial inclusion (Cœuré & Shin, 2021). Novel financial products that may also utilize this technology, though this is more nebulous as to which products may be enabled. In one sentence, it’s bringing the operational efficiency that was pioneered technologically from crypto to traditional finance and ideally represents a kick-in-the-pants for modernizing legacy financial infrastructure.

Of the world’s major economies, China is a glaring exception in how advanced their CBDC pilot is and how long a history the eCNY (the Chinese CBDC) has had already. The EU has just wrapped up their 2 year initial exploration of the Digital Euro (European Central Bank, 2023), the UK has just moved into the initial scoping of the Digital Pound (Bank of England, 2024), and the Federal Reserve is just engaged in light experimentation for a wCBDC Digital Dollar (Board of Governors of the Federal Reserve System, 2022). Meanwhile, the People’s Bank of China has been working on some version of a Chinese CBDC since at least 2014 (Areddy, 2021), which means it is only 5 years younger than Bitcoin - the grandfather of everything tokenized.

CBDCs tend to come in two different flavors: retail (rCBDC), where end users like you and me could use something like a Digital Euro app and wholesale (wCBDC), which would be used on the backend by financial institutions (Overgaag, n.d.). If you’ve heard anything about CBDCs, it’s probably about retail CBDCs being a 1984-esque technological panopticon from the alarmist section of Twitter/X. Retail CBDCs certainly have their concerns around privacy in both Western economies and other countries around the world, but I will be avoiding that can of worms for this prediction. What I find far more fascinating geopolitically is the use of wCBDCs as a means of modernizing and even changing the macro-patterns of international trade.

As any long-term ChinaTalk or even casual “China watcher” would know, China is the world’s largest trading partner for the majority of the world’s countries, and China is the single largest exporter on the planet (World, n.d.). The bottom line, no matter how you slice it, is that China trades A LOT.

Despite their heft in trade volume, China has comparatively much less power financially in comparison to the US. Contrary to the alarmism you may see in headlines, USD is still by far and away the world’s most used reserve and trade currency, and US control over international financial institutions, especially coupled with close Western allied support, is in a league of its own. This is how the US led the charge to cut Russia off from the Swift consortium after the invasion of Ukraine, widely considered at the time to be the “economic nuke” option at the time in early 2022 (Deliso, 2022). It should be no small leap to realize this is not an enviable outcome for China .

China, despite its tremendous trade growth, still sees the internationalization of both the Chinese Yuan and the Hong Kong Dollar in the low single digits (depending on which metric you look at) - more closely pegging the CNY/HKD pair in the same ballpark as the British Pound or the Canadian Dollar, let alone the Euro or especially the Dollar (Triennial Central Bank Survey: OTC Foreign Exchange Turnover in April 2022, 2022). The CNY’s use is growing internationally, make no mistake, but it has a tremendous way to go before you can realistically ever consider it “competing” with the greenback.

CBDCs represent a fresh start in some ways for how international trade works operationally. International trade is a complex topic, and I cannot do it justice in just a few thousand words, but I’ll try to explain what I see as the rationale for the increased focus on CBDCs as a means of strengthening CNY/HKD use.

The modern international financial system has its roots in the post-WWII environment, often called Bretton Woods (Anderson, 2022). Because the US was such a large and powerful country at the time these rules and norms were standardized (and with every other major developed economy still reeling from the devastation of the Second World War), the US was able to magnify its power financially even relative to the massive size of its economy. While the true Bretton Woods financial system no longer exists today with the ratification of the 1976 Jamaica Agreement (Memorandum From Secretary of the Treasury Simon to President Ford, 1976), the US’s “exorbitant privilege” as being the unquestioned financial leader of the world remains today.

Even as the world has modernized, the financial system has only been haphazardly upgraded technologically speaking. Even in 2024, the financial system is slow and clunky, with settlement times often taking days of passing through obscure intermediaries, a problem which is exacerbated for countries which are not using highly liquid currencies like USD/EUR/JPY. For reference, the average remittance fee is 6.18% in Q3 2023, which means just sending one payment from person A to person B in another country costs upwards of 6% of the transaction (Remittance Prices Worldwide Quarterly - Q3 2023, 2023).

For another example, if you have a company that needs to send payment from country A to a supplier in country B, you are potentially going to need to deal with a complex web of financial intermediaries which will all likely require some type of credit line, who will then send payments to one another (with potentially opaque payment lines) that will likely take several days. If everything goes “well”, your supplier will be paid a couple days down the line. If it goes poorly, your payment might get lost or delayed, resulting in significant problems for future business dealings with that supplier. Oh, and each of those aforementioned intermediaries will be taking a cut of the pie and impacting your bottom line (Rolfe, 2021). This article (link at the end) gives good insight into how messy it can get, and just know it gets worse the less liquid your currency is. Comparatively, mCBDC networks are remarkably lean, with efficiency that reduces settlement times to minutes rather than days.

In addition to this operational headache, US sanctions can decide who is able to access the global financial system and who is a financial pariah – such as Cuba, Iran, and North Korea (Masters, 2019). US sanctions are obviously not airtight, but there is a reason why they can change the tune of foreign governments considering actions hostile to the interests of the US government. This is especially true when coupled with allied governments like the G7/EU, who in aggregate control the vast majority of financial power globally.

For reasons that should be abundantly clear, there is definitely concern for US-led sanctions among the Chinese leadership, and seeing how the Russian economy is handling under sanctions probably hasn’t dissuaded that notion (though make no mistake the Chinese economy is not the Russian economy). One can imagine a number of flashpoints which would make potential sanctions likely, ranging from the negligible to the economy-disrupting. As a result, China has taken steps to sanction-proofing portions of its economy, and I am not alone in thinking the use of the eCNY and CBDC infrastructure will be at least some part of that strategy to reduce dependence on the US for finance as also noted by the Carnegie Endowment for International Peace’s Robert Greene (Greene, 2021).

So if you are a developing economy in the Global South, you are likely in a situation where: (1) you can effectively be cut off from global markets due to politics with no recourse, (2) forced to use a technologically antiquated system that introduces significant operational headaches, and (3) using a system not even your largest trading partner would prefer to use.

International CBDCs networks are in the very early stages of being built out, including consortiums like Project mBridge, featuring the central banks of China, HK, Thailand, and the UAE (“Project mBridge,” 2023). China has a tremendous voice in shaping how these systems manifest, since it represents by far the largest economy actively engaging in these pilots. 

One major manifestation is how these systems will arbitrate sovereignty, as some pilot consortiums are testing out network partitions. These partitions effectively give a ruleset for all the participants in your jurisdiction, and allow for specific rulesets at the intersection of different partitions. For example, China could control the Chinese banks on the platform, and anyone holding the eCNY tokens via their network partition. China could also control how their trade relationship might manifest with another country’s partition - let’s say Brazil. 

In a world where you do trade financing through Swift messaging, the US and friends can cut off your access to the system, and most other countries will follow suit because it is very difficult to stand up your own parallel system. Russian banks learned this the hard way, because even neutral third countries found it more difficult and more expensive to trade with them. Conversely, in an mCBDC environment under this system, the US+ group would be unable to affect the trade plumbing between say South Africa and China.

The US is slowly but surely starting to voice its own beliefs through a number of small projects like Project Cedar, but it’s still well behind the curve compared to China (Project Cedar Phase II, 2023). China can effectively serve itself as the US did during the Bretton Woods era, magnifying its power to serve its own interests absent the serious voices of other major economies. Make no mistake, willfully ignoring sanctions will have political consequences of its own, but it’s building out a separate set of financial rails that did not really exist beforehand.

China finds itself with a perfect opportunity to build up a set of financial rails that are: (1) more operationally efficient than current financial rails, (2) able to streamline the trade relationship with Global South trading partners, (3) serve the interests of internationalizing your currency, and (4) help to isolate against sanctions.

With this background set up, I believe it is self-evident that a China-led push to push CBDC networks is an inevitability, and not a what-if. I have set 2028 for a target date of this prediction, because I believe this is roughly when CBDC consortia will move out of pilot phases and into production, thereby allowing real money to be moved around on these networks. $50bn also may sound like a lot, but considering China exported $3.34 trillion in 2021, that means only ~1% of exported goods are on this system.

I believe that 95% captures the true likelihood of this event, as the only items I see disrupting this march towards international trade tokenization are a domestic Chinese political crisis which makes the longer-term strategic plans untenable for the short term. Even if the US/EU get their act together and get their own CBDC networks up and running for international finance in the coming years, they’d likely still interlink with the Chinese CBDC for the operational benefits alone, which would only make that total number go up higher.

Cross Border Payments Example: https://www.paymentscardsandmobile.com/cbdc-how-to-save-120-billion-in-cross-border-payment/

Adrian, T., He, D., Mancini-Griffoli, T., & Sun, T. (2023, November 20). Central Bank Digital Currency Development Enters the Next Phase [International Monetary Fund]. IMF Blog. https://www.imf.org/en/Blogs/Articles/2023/11/20/central-bank-digital-currency-development-enters-the-next-phase

Anderson, S. (2022, March 21). Bretton Woods agreement and the institutions it created explained. Investopedia; Investopedia. https://www.investopedia.com/terms/b/brettonwoodsagreement.asp

Areddy, J. T. (2021, April 5). China creates its own digital currency, a first for major economy. Wall Street Journal. https://www.wsj.com/articles/china-creates-its-own-digital-currency-a-first-for-major-economy-11617634118

Bank of England. (2024, January 4). The digital pound. Bank of England; Bank of England. https://www.bankofengland.co.uk/the-digital-pound

Board of Governors of the Federal Reserve System. (2022, January 20). Federal Reserve Board releases discussion paper that examines pros and cons of a potential U.S. central bank digital currency (Cbdc). Federal Reserve System. https://www.federalreserve.gov/newsevents/pressreleases/other20220120a.htm

Central bank digital currency tracker. (2024). Atlantic Council. https://www.atlanticcouncil.org/cbdctracker/

Cœuré, B., & Shin, H. S. (2021). III. CBDCs: An opportunity for the monetary system. Bank for International Settlements. https://www.bis.org/publ/arpdf/ar2021e3.htm

Deliso, M. (2022, February 26). What is SWIFT and why it’s being called the “nuclear” option for Russian sanctions. ABC News; ABC News. https://abcnews.go.com/International/swift-called-nuclear-option-russian-sanctions/story?id=83131068

European Central Bank. (2023). Eurosystem proceeds to next phase of digital euro project. https://www.ecb.europa.eu/press/pr/date/2023/html/ecb.pr231018~111a014ae7.en.html

Greene, R. (2021, October 6). Beijing’s global ambitions for central bank digital currencies are growing clearer. Carnegie Endowment for International Peace; Carnegie Endowment for International Peace. https://carnegieendowment.org/2021/10/06/beijing-s-global-ambitions-for-central-bank-digital-currencies-are-growing-clearer-pub-85503

Masters, J. (2019, August 12). What are economic sanctions? Council on Foreign Relations; Council on Foreign Relations. https://www.cfr.org/backgrounder/what-are-economic-sanctions

Memorandum From Secretary of the Treasury Simon to President Ford. (1976). [FOREIGN RELATIONS OF THE UNITED STATES, 1969–1976, VOLUME XXXI, FOREIGN ECONOMIC POLICY, 1973–1976]. United States Department of State: Office of the Historian. https://history.state.gov/historicaldocuments/frus1969-76v31/d128

Overgaag, A. (n.d.). Wholesale CBDC vs. Retail CBDC: Key differences. CoinTelegraph; CoinTelegraph. Retrieved January 14, 2024, from https://cointelegraph.com/learn/wholesale-cbdc-vs-retail-cbdc-key-differences

Project Cedar: Improving cross-border payments with distributed ledger technology. (2023, May 18). Federal Reserve Bank of New York; Federal Reserve Bank of New York. https://www.newyorkfed.org/aboutthefed/nyic/project-cedar

Project mBridge: Experimenting with a multi-CBDC platform for cross-border payments. (2023). Bank for International Settlements. https://www.bis.org/about/bisih/topics/cbdc/mcbdc_bridge.htm

Remittance Prices Worldwide Quarterly—Q3 2023. (2023). [Remittance Prices Worldwide Quarterly]. The World Bank. https://remittanceprices.worldbank.org/sites/default/files/rpw_main_report_and_annex_q323_1101.pdf

Rolfe, A. (2021, November 8). CBDC: How to save $120 billion in cross-border payments. Payments Cards & Mobile. https://www.paymentscardsandmobile.com/cbdc-how-to-save-120-billion-in-cross-border-payment/

Triennial Central Bank Survey: OTC foreign exchange turnover in April 2022. (2022). https://www.bis.org/statistics/rpfx22_fx.pdf

World. (n.d.). Observatory of Economic Complexity (OEC); Observatory of Economic Complexity (OEC). Retrieved January 14, 2024, from https://oec.world/en/profile/world/wld