Next year, visitors and atheletes attending the 2022 Beijing Winter Olympics may pay for goods and services using what is currently the world’s most advanced digital currency: the digital yuan, or e-CNY.
Even in a region where governments are rapidly developing digital currencies, the e-CNY stands out. Trials began in four Chinese cities in May 2020. Since then, the People’s Bank of China (PBOC) has expanded the program to include major banks, local and foreign retailers, digital apps, and the city of Hong Kong. The PBOC recently claimed that 10 million users had signed up for trials.
The scale and speed of the rollout has led to concerns that “China is winning the digital currency battle by a long shot,” to quote Michael J. Casey, Coindesk’s Chief Content Officer. Officials in the Biden Administration are reportedly worried that the digital yuan threatens the U.S. dollar’s status as the dominant reserve currency, a change that would be, in the words of the Atlantic Council’s Josh Lipsky, “a national-security issue.”
Yet the U.S. should not be worried about China’s digital yuan (e-CNY) argues Eswar Prasad, a professor of Trade Policy at Cornell University and author of The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance, publishing this September.
Prasad argues that international reserve currencies need the right institutional environment—an independent central bank, the rule of law, and checks and balances—and that “China is showing no indication of moving in that direction.”
That’s not to say Prasad doesn’t buy into the rise of digital payments and currencies.
He’s convinced the end of cash is coming. “Cash has a lot of advantages…but all of these advantages are swept away by the sheer advantage of having digital payments at your fingertips,” Prasad told Fortune‘s Clay Chandler in an Eastworld Spotlight conversation.
Innovations in financial access and payment systems will benefit developing countries, such as those in Southeast Asia, due to their undeveloped financial infrastructure and unbanked populations. Prasad says these economies have the potential to leapfrog their more advanced counterparts when it comes to implementing new financial technologies, since “there are no incumbents to thwart the entry of new players.”
In his interview with Fortune, Prasad talks about digital currencies, the future for cash, and the prospects for the digital yuan. This interview has been edited for length and clarity.
Fortune: How much longer does cash have?
Eswar Prasad: The end of cash is certainly on the horizon. Digital payments, whether with the swipe of a card or a phone, is becoming the norm in advanced economies and many emerging markets. We have technologies that make it much easier for consumers and businesses to conduct these transactions much more efficiently than cash could ever be.
You note in your book that one of the first instances of the use of cash was here in China.
China has the distinction of creating the world’s first paper currency. The initial form of paper currency was in the form of notes backed by stores of commodities or precious metals that well-known merchants provided.
In a curious and interesting symmetry, China is probably also going to play an important role in the disappearance of cash.
Smaller economies like Sweden and developing economies like China have been on the cutting edge of this shift into digital currencies. Why is that?
For many developing economies, a central bank digital currency (CBDC) is a way to provide the masses, including poor and unbanked households, with easy access to a digital payment system that brings them into the broader financial system.
There is a different objective in countries like Sweden. The Swedish Riksbank is perfectly happy with private payment providers. But they are concerned that if central bank money disappears—as it is fast doing in Sweden—and the entire payment infrastructure is in the hands of the private sector, that could lead to fragility. The e-Krona would be a backup payment system that could operate even if the private payment system isn’t.
Despite being very advanced in terms of its central bank digital currency, China has a real aversion to cryptocurrencies.
It’s not just China: many governments and regulators are very concerned about cryptocurrencies. The idea of Bitcoin was that it would provide some degree of anonymity, as well as providing a low-cost and efficient payment system. There were concerns that cryptocurrencies might end up fueling illegal commerce, both within and across national borders.
Now, it turns out Bitcoin is an abject failure as a medium of exchange. It’s very cumbersome to use. It is slow in terms of having transactions validated. It’s quite expensive: the average cost of one transaction using Bitcoin is around $20. So you can’t buy a cup of coffee using Bitcoin unless it’s a very expensive and fancy cup of coffee.
Instead, Bitcoin and other cryptocurrencies have become stores of value. And that creates its own concerns. If you have a lot of investors, especially retail investors, putting their money into a purely digital asset that is not backed by anything and has no intrinsic use, then that bubble will one day burst and have implications to financial stability.
I think these are the sorts of concerns that have central banks and regulators, in China and elsewhere, very worried.
People have argued that the rise of a Chinese CBDC is something the U.S. should be alarmed about, and that it could potentially displace the U.S. dollar. Do you share that concern?
I do not. The e-CNY is going to play a marginal role in increasing the renminbi’s prominence in international finance. Almost all cross-broder payments, whether for trade or finance, are almost entirely digital anyway. And the People’s Bank of China has made it very clear that, at least in the short term, it does not see the e-CNY as being available for transactional use outside the country.
What really matters for a reserve currency is a country’s economic size and the depth and liquidity of its financial markets. It needs an institutional framework that wins the confidence of foreign investors, including an independent central bank, the rule of law, and institutionalized checks and balances among various arms of the government. Most of the existing reserve currencies have those attributes. China is showing no indication of moving in that direction.
So you don’t think that the greater adoption of digital currency makes it more complicated for China to keep its capital accounts closed?
As you have more digital currencies, the conduits for money to come into and out of China will certainly increase over time. But the People’s Bank of China has already indicated—and has shown through its words and actions—that it is committed to opening the capital account and a more market-determined exchange rate.
But if China were to try to clamp down on its capital account, it’s going to become a lot harder.
This interview is part of Eastworld Spotlight, a series of conversations on matters of business, tech, and finance with executives, experts, entrepreneurs, and investors in Asia. Subscribe to Fortune’s Eastworld newsletter to get each issue in your inbox.
Subscribe to Fortune Daily to get essential business stories straight to your inbox each morning.