China’s Digital Yuan Could Overtake Euro Sooner

The euro would likely be overtaken by the Chinese digital yuan if the European Union does not create its own state digital currency by 2025, an independent non-profit European research institute focused on blockchain research, has predicted in a report examining the issue of central bank digital currencies (CBDCs).

Dutch non-profit organization, DGen, made the prediction in its new CBDCs: Geopolitical Ramifications of a Major Digital Currency report sponsored by the European Central Bank (ECB), Standard Chartered Bank and the Frankfurt School of Management and Finance.

It states that China’s state-owned digital currency may pose a threat to the euro even though the digital yuan is not likely to replace the US dollar as the world’s reserve currency because it has a low chance of outperforming the dollar due to “political unrest in China and efforts to move reserves.”

At present, the US dollar, the euro, and the Chinese yuan are the top three globally. The DGen researchers believe that CBDCs could change the positioning of these major currencies – particularly as the US dollar is the current dominant global currency and the US appears not ready to launch a digital currency.

They say Europe’s launching of a well-designed digital currency could give the euro, as the second most important currency, the opportunity to become an effective settlement method for international trade outside of the politics of the US-China currency war.

The also add that the EU launching a digital currency will kickstart a restructuring that will require all members of the Eurozone to reconsider the goals of the combined currency, revive the common goals of the Eurozone, and strengthen the bonds of the different member states. Yet, nothing is clear about the future.

The uncertainty surrounding what’s to come regarding CBDCs fits the narrative by fintech guru David Birch, who framed it to be the the global powers’ “Currency Cold War” in which China and the US are vying for supremacy.

Birch believes the digital currency technology will have considerable implications for the future of money. As written in his book, he expects one of four currency scenarios to unfold by 2030:

The Rainbow Scenario in which the US dollar’s dominance wanes but no other currency emerges as dominant; Red in which China’s CBDC dominates; Green where the U.S. retains dominance; and Blue in which a non-government-backed cryptocurrency (such as Bitcoin) rules.

While the DGen research predicts that CBDCs will have to play nice with private stablecoins and that three to five nations globally will completely replace their currency with a CBDC by 2030 (though didn’t say which), it also maintains that smaller nations will consider a switch to the digital dollar if the option becomes available.

It somewhat points to the potential shift that could be seen with time as a result  of what the Dutch non-profit organization highlights to be China’s several steps towards de-dollarisation. These steps include the Belt and Road Initiative to improve economic growth and trade among a number of Asian nations and Russia, China’s rise in prominence economically and the launch of its Digital Currency/Electronic Payment (DC/EP) project thus gaining an head start.  It states:

“This (DC/EP) initiative appears to be moving far more rapidly than the other economic superpowers moves towards digitisation, and could pose a serious threat to both the Dollar and the Euro.”