As countries all over the world weigh the benefits of central bank digital currencies, China is pressing its lead with the rollout of the digital yuan ahead of the Beijing Winter Olympics. 
The People's Bank of China (PBOC) announced on Tuesday that 261 million individuals, or about a fifth of the country's population, have now set up digital yuan wallets. The report comes one month after the wallet was made available for download on Chinese mobile app stores. 
The U.S. Federal Reserve on Thursday also released a long-awaited white paper looking at the viability of a digital dollar. The paper weighs the pros and cons of the idea, but avoids taking a firm position on whether the U.S. should follow in China's footsteps,
"While a [central bank digital currency] could provide a safe, digital payment option for households and businesses as the payments system continues to evolve, and may result in faster payment options between countries, there may also be downsides," said the Fed in a news release. 
Central bank digital currencies — or CBDCs for short — have emerged as a state-sanctioned alternative to the rise of cryptocurrencies and stablecoins. Designed to serve the same basic functions as physical cash, they give central banks a toehold in the emerging digital economy, as well as a new tool for monetary policy that could change how governments pay citizens. 
In China's case, the roll-out comes on the heels of an aggressive crackdown on private cryptocurrencies, which has effectively made the digital yuan the only game in town. 
But not everyone in China can bust out their new digital wallets yet. Only users who live in pilot areas, such as Shenzhen and Chengdu, can actually make payments, and only for a select number of predetermined "scenarios" such as paying for Didi, China's ridesharing giant.  
In addition, most Chinese people already rely on mobile apps such as WeChat Pay and Alipay for payments, so compelling use-cases for the digital yuan are still being worked out.  
Compared to the trillions of yuan that change hands every day in China, the digital currency accounts for just $13.78 billion worth of transactions, according to Zou Lan, director of the PBOC financial markets department. Alipay, for comparison, had 1.3 billion active users and processed $17 trillion worth of transactions annually in mainland China as of June 2020. 
"That's a small drop in the bucket," Chris Vecchio, a senior strategist for DailyFX, told Cheddar. "While there has been increased usage and increased adoption of the digital yuan, it's nowhere near on the scale that's necessary to declare it a resounding success."

China's Head Start

Whether the digital yuan ends up a success or not, for the moment, China is leading the pack among major economic powers in testing out CBDCs on a large scale. 
This head start wasn't achieved overnight. China started looking into digital currencies back in 2014, when the PBOC set up a task force to study the key technologies behind the concept. Two years after that, the central bank developed a prototype, which it soon started shopping around to commercial banks to test out how it would work in the actual banking system. 
Over this period, China also became a global hub for crypto mining and trading. The government initially tolerated the industry, even as it criticized crypto for spurring illegal activity and economic instability. This situation finally came to a head with last year's crackdown
The crypto ban may have cleared the way for the digital yuan, but the pilot program started well before China decided to kick the industry to the curb. The government announced the pilot in late 2019 and started issuing digital yuan to residents in select cities in 2020.  
In the U.S., meanwhile, CBCDs were not an unknown concept, but they had no major advocates among top government officials — no less a process in place for developing them. 
One exception was Jared Kushner, son-in-law and senior advisor to former President Donald Trump, who pitched the idea of a Fed-backed cryptocurrency back in 2018.
"My sense is it could make sense and also be something that could ultimately change the way we pay out entitlements as well saving us a ton in waste fraud and also in transaction costs," Kushner wrote to Treasury Secretary Steve Mnuchin in a memo obtained by CoinDesk. 
It's unclear if Mnuchin was receptive, but it wasn't until 2021 that the Federal Reserve started seriously looking into CBDCs —  by which time they were popping up all over the world.
According to the Atlantic Council's Central Bank Digital Currency Tracker, nine countries have fully launched a CBDC; 16 are actively developing one; and 14 are currently in the pilot phase. 
The U.S. is among the 41 countries that are still in the research phase. 
Federal Reserve Chairman Jerome Powell has noted multiple times that it's better to get it right than get it done fast, especially given the U.S. dollar's reserve currency status. 
However, proponents of a digital dollar are eager to see the U.S. take more of a leadership role now, so that it can inform the rollout of CBDCs worldwide. 
The much-anticipated white paper — released on Thursday after multiple delays —  is a step in that direction, but not a clear statement of intent on the part of the Federal Reserve. It's main goal is to "foster a broad and transparent public dialogue," according to the paper. 
The uncertainty hasn't stopped U.S. companies from taking steps to prepare for a Fed-backed digital currency. Visa and Mastercard have both struck partnerships with blockchain developers to test retail applications that would be compatible with a central bank digital currency. 
"If successful, CBDC could expand access to financial services and make government disbursements more efficient, targeted, and secure — that’s an attractive proposition for policymakers," said Catherine Gu, Visa’s head of CBDC, in a company FAQ

More Incentive

One reason the U.S. and China have diverged on this issue may go back to their different political and economic systems, Vecchio explained. 
"For a country like China, there is a different incentive for these digital currencies, and in part it's surveillance and social control," he said. "For a centrally-planned economy, that's almost necessary."
He added that digital currencies could be a harder sell in the U.S., where citizens may be more resistant to the idea of the Federal Reserve knowing about their every transaction, even if the central bank takes measures to avoid that kind of close surveillance.  

PBOC has said that small transactions would be anonymous, in order to keep the digital yuan as much like physical money as possible, while larger transactions could be tracked. 
The bank also outlined a much broader set of goals that it's trying to achieve with its digital yuan, including improving financial inclusion and cross-border payments — a pitch that should be familiar to those tracking the stablecoin and decentralized finance space. 
Satisfying existing consumer demand for digital payments is another one of China's goals. 
A report from a PBOC working group last summer pointed out that the share of cash transactions was declining, and that 66 percent of transactions in the country were already made via mobile payment applications. 
While the PBOC sees the digital yuan as existing alongside popular payment apps, widespread adoption of digital payments in China has cleared the way for a CBDC. 
The U.S. notably has a more robust payment system overall, with greater use of credit and debit cards, which could dampen the demand for a digital dollar. 
Regardless, many are still calling for the U.S. to catch up with China so that it doesn't get left in the dust on a potentially game-changing new technology. 
"There is a level of competition here," Vecchio said. "No one wants to be the last one to the party. You have to be at the technological cutting edge innovating, lest you be crowded out down the line."