Policy Responses to Cross-border Central Bank Digital Currencies – Assessing the Transborder Effects of Digital Yuan

Abstract

Current literature on central bank digital currencies (CBDCs) generally focuses on regulatory issues in the domestic context. This paper discusses the challenges when a CBDC circulates across national borders. It addresses three cross-border spillover effects of the CBDC: the crowding out effect on local currency; challenges to capital control for regulators; and infringement of user privacy. The paper posits the Digital Yuan as the sample on which spillover effects can be assessed as it is circulated beyond its borders. It is estimated that the major fund receivers of the Belt and Road Initiative (BRI), and China’s neighbors, are most likely to be affected by the Digital Yuan. These countries will benefit from convenient, efficient, and secure transactions as the Digital Yuan circulates. But they may face problems when the Digital Yuan becomes widely used in local markets. They will find it difficult to control or monitor the flow of the Digital Yuan, and will have to take measures to protect the privacy of their domestic users. The authors therefore propose unilateral, bilateral, and multilateral strategies to cope with the corresponding spillover effects. The paper’s analysis suggests that the adverse effects of the cross-border uses of CBDCs can be addressed and mitigated by adequate institutional design, and by multilateral coordination efforts.