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By Kim Bo-eun
Central banks around the world are rushing to prepare for the possible issuance of digital currencies, while China has begun testing its own digital tender.
According to the People's Bank of China, the country's central bank, internal tests of a central bank digital currency (CBDC), named the digital currency electronic payment (DCEP), began this month in four cities ― Suzhou, Shenzen, Xiong'an and Chengdu.
CBDC is a term used to distinguish the digital currency of central banks from those in the private sector.
Chinese media recently reported that Xiancheng District in Suzhou is expected to pay government workers 50 percent of their transport subsidies in the form of DCEP next month.
Screenshots of a trial version of the digital currency developed by the Agricultural Bank of China circulated online, following a leak.
According to the Hong Kong-based SCMP, a handful of companies in Beijing, including U.S. restaurant chains McDonald and Starbucks, will join a pilot program for DCEP.
The currency is expected to make its official debut soon following the pilot test, and China aims to test the currency at 2022 Winter Olympic venues.
Sweden is also leading developments in CBDCs, and began testing its Riksbank's e-krona in February.
In the United States, efforts to develop a digital currency have been led by Facebook's Libra. Facebook's global reach is considered to have the potential to instantly rival traditional currencies.
The Libra Association, the Swiss-based group Facebook created to issue and govern the digital currency, plans to offer a stable coin backed by one country's currency.
Facebook said it is also working on digital versions of government-backed currencies.
Central banks and regulators around the world have remained skeptical about Libra, due to the absence of a global regulatory framework.
The Federal Reserve, meanwhile, is known to be considering developing a CBDC, a shift from its previous stance; and the Bank of Korea said earlier this month it was reviewing the technical and legal aspects of introducing its digital currency. Research is ongoing to set up a pilot system and to conduct tests by next year.
Other major economies are also preparing for the possible development of electronic currencies. In January, the central banks of the U.K., the eurozone, Japan, Canada, Sweden and Switzerland agreed to take part in joint research on a CBDC.
In a survey conducted by the Bank for International Settlements last year on 66 central banks, 80 percent responded that they are engaging in some sort of work on a CBDC. About 40 percent said they have progressed from research to experiments and 10 have developed pilot projects.
Choi Hwoa-in, a blockchain adviser to the Financial Supervisory Service, said the shift toward digital currencies was inevitable.
"Central banks have relatively been slow to act, but have accelerated preparations after Facebook unveiled its Libra initiative in June last year," she said.
"A CBDC holds many advantages including reduced costs in issuing currency, and enhanced transparency in tracking money-laundering practices. Yet there are also risks such as the possibility of a country's entire financial system being shaken due to a cyberattack."
The expert noted that various digital currencies may likely exist in the future, as more leading tech companies are expected to develop their own forms of currency.
"The system will likely become more complex as different options become available for people in addition to using their own country's currency," she said.
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