China’s move to develop its own digital currency is aimed at raising the renminbi’s international status to challenge the dominant U.S. dollar, but privacy concerns over footprints left by digital transactions remain an obstacle, analysts say.

Mainland Chinese banks and technology firms are required to test-run digital currency electronic payment, following a proposal in 2014 by the People’s Bank of China, the country’s central bank, to develop a digital currency to strengthen protection of the renminbi.

As tensions with the United States have reached new heights, China is facing a more pressing need to internationalize the renminbi to avoid possible impacts resulting from further sanctions by Washington, such as a ban on the mainland and Hong Kong from using the SWIFT payment system to process greenback-denominated transactions. Beijing also hopes to popularize its own digital currency as a way to challenge U.S. dollar dominance in international trade, analysts say.

One key obstacle to China’s digital currency push lay in privacy concerns among international users, including the European Central Bank, because capital flows were traceable in digital transactions, DBS (Hong Kong) senior economist Nathan Chow said.

“Western countries may not be able to overcome [the privacy risks],” he said.

As well, the extent to which the international community would accept a digital renminbi would still hinge on the original currency’s liquidity, stability and convertibility, Chow said. “Other countries will issue their digital currencies as well. People will… see if the yuan is really internationalized when deciding whether to use the digital yuan.”

A digital currency would change the landscape of electronic payment within mainland China; however, a Chinese digital currency was unlikely to be put into extensive use in the near future because it would be linked to the renminbi instead of being a brand-new independent currency, OCBC Wing Hang Bank economist Carie Li said.

In 2018, electronic payments accounted for 80% of all transactions in mainland China. Alibaba’s Alipay commanded over half of the market share, followed by Tencent’s Tenpay, which included WePay.

The PBoC had earmarked Shenzhen, Suzhou, Xiongan and Chengdu as pilot locations to test out the digital currency, and the Greater Bay Area encompassing Hong Kong, Macao and Guangdong was also expected to be included, Li said.

“This will mainly make it more convenient for travelers to spend in Hong Kong by offering an additional payment method that does not require money exchange,” she said.

Li believed the Bank of China (Hong Kong) already possessed the related technology and was ready to issue a digital renminbi in Hong Kong.

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