Testing for the digital yuan began in , but the early adoption numbers were less encouraging than Chinese officials may have hoped for. Adoption numbers then doubled by January in the lead-up to the Winter Olympics hosted in Beijing. The Geopolitics of Currency Hegemony The battle for currency hegemony is better characterized as an insurgency than a Cold War, and China may be willing to employ geopolitical tactics to outmaneuver the current-standing hegemon.
There are three primary ways that China could leverage its geopolitical clout to achieve RMB internationalization through the digital yuan. The domestic goals of the BRI are largely economic. China has an overcapacity of raw materials such as steel and coal and producers are desperate for new export markets. The BRI also aims to economically develop impoverished regions in western China as a part of trade routes planned through central Asia.
Regionally, China hopes to counter the U. Globally, China aims to finance infrastructure spending in developing countries, thus currying favor and potentially gaining political leverage in recipient nations. This is where the digital yuan comes in. The digital yuan bypasses any third-party banks or local institutions and practically eliminates fees while executing transactions instantly.
With Chinese technology comes Chinese control, as many technology firms in China are only nominally in the private sector. But for a project as ambitious as currency hegemony, China is also turning to old allies to help implement an international CBDC. Many of these CBDCs are limited to domestic use, but China is one of the first countries seriously evaluating cross-border transactions using a CBDC, a crucial first step towards global adoption. Their experimentation has spawned the multiple CBDC , or mCBDC, bridge project, a collaboration between four financial jurisdictions—China, Hong Kong, Thailand, and the UAE—that aims to create infrastructure to facilitate efficient, low cost transfers between CBDCs while respecting existing regulations and privacy norms within each jurisdiction.
The project identified 15 use cases of CBDC transfers between countries including commercial payments, wealth management, bond issuance, trade settlements, and supply chain financing. This potentially indicates a broader reach for collaboration than simply Chinese allies and regional banks. Officially known as a Digital Currency Electronic Payment DCEP , China wants to replace its fiat currency with the digital one to encourage cashless transactions, ushering in a new era for world economics.
Like Bitcoin, it also relies on blockchain technology to facilitate and verify transactions, but unlike Bitcoin, it is centrally controlled by regulatory authorities and backed up by fiat currency reserves. How does it Affect Bitcoin? China has a somewhat unclear relationship with the popular cryptocurrency Bitcoin. The reason stated was concerns related to the climate as bitcoin mining requires tremendous amounts of energy to run Application-Specific Integrated Circuits ASICs — computers that solve complex cryptographic mathematical problems part of the verification process in the blockchain.
Even before that, initial coin offerings ICOs for many cryptocurrencies, like Ethereum, were also banned. Why does China want to Ban Bitcoin? The reason is simple. China has no control over Bitcoin as its decentralized nature provides the currency bearer with anonymity. This has raised widespread concern amongst the communist party as it means to trade in Bitcoin can hide money laundering and sponsor criminal activities against the state.
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CBDCs are similar to stablecoins, which are indexed at a ratio with a specific fiat currency. So the digital yuan is nothing more than the digital equivalent of China's physical currency: you digitally hold the fiat currency in a mobile wallet instead of a physical bill in your pocket.
Every physical note printed by the central bank has a unique identifier and therefore every digital yuan token issued has the same. Unlike cryptocurrencies, CBDCs are not usually based on a decentralized blockchain, as the central bank would seek to maintain clear authority over ledgers.
We will explain more about this in a moment. Is the digital yuan already in use? First proposed in , the digital yuan has been in a pilot phase since April Starting in October , the People's Bank of China PBoC has distributed millions of digital yuan to citizens as part of an effort to test the technology — and create some buzz around it.
This is still ongoing in Chinese citizens can already spend the digital yuan at a growing number of stores across the country, including Walmart. In fact, according to a July PBoC progress report, the digital yuan has already been used in The next item on the agenda for the digital yuan is a massive launch during the Beijing Winter Olympics in February That launch will include overseas visitors.
Fan Yifei, deputy governor of the Chinese central bank, explained in an April article published on Yicai Global, a state-sponsored news outlet, that physical money is expensive to print and maintain, easy to forge, and its anonymity means which can be used for unlawful purposes.
The digital yuan, he said, would overcome these problems. There are reasons to believe that reducing the anonymity of money is the main driving force behind the project. After all, the Chinese Communist Party, which controls the government under an unchallenged regime, has built the largest surveillance state in the world.
Yao Qian, former director of the digital currency institute at the PBoC, said in May that it was not the bank's intention to observe every transaction in real time. But the Chinese government has deployed millions of face-recognition cameras across the country to track anything and everything, and even punish minor offenses like crossing the street without looking at traffic signs. A digital yuan could fit neatly into this surveillance infrastructure. Former US deputy national security adviser Matt Pottinger pointed out that the digital yuan could be used to retaliate against companies and individuals who criticize Beijing.
What are the differences between Bitcoin and the digital yuan? China has repeatedly suggested incorporating many of the buzzwords associated with the blockchain into the digital yuan. But revealingly, decentralization is not one of the words on the list. Bitcoin and digital yuan make peer-to-peer payment easier.
It's the only resemblance, really. Little did I realize my prognostication would begin to be realized so quickly. It is the first digital currency launched by a large economy and is a direct competitor with Bitcoin and other digital currencies. It had been run via small pilot programs in a few pilot cities including Shenzhen, Suzhou, and Chengdu with civil servants getting half their pay in the form of the digital yuan before its formal launch.
This article , from February, provides considerable insight as to the mechanics of the then yet-to-be launch digital yuan would work in the economy. The global risk presented by a digital yuan may be at least part of the reason the US and its allies are considering a boycott of the games, after the principal reason, the finding by the Dutch Parliament and the U. Among other things, the digital yuan is reported to use near field communication technology, or NFC, that would allow customers at the Olympics to pay vendors by tapping an NFC-enabled payment device with their telephone, much like Apple Pay.
It will be as if yuan were a global currency, a no-fee American Express debit card, accepted everywhere without transaction or exchange fees to customer or merchant. As the Nikkei reported, The digital-yuan app would have a function Alipay a Chinese company payment platform lacks: Users can transfer money between accounts by tapping phones, much like having physical cash change hands. The currency will be legal tender, so it can be exchanged without needing a bank as an intermediary.
This may help make China's economic system more resilient. Cash is used much less often in China than elsewhere thanks to the widespread adoption of services like Alipay and Tencent Holdings' WeChat Pay, meaning that the economy could be all but paralyzed if a disaster disrupts mobile phone service. By enabling transfers with no need for an internet connection, the digital-yuan app would ensure that commerce can continue as long as power is available.
That standing was further enhanced as America became the financier of the post-war European and Asian economic recovery under the Marshall Plan, which cycled USD to recovering war-ravaged countries so that they could, in turn, return them to US companies to rebuild infrastructure, factories, and homes and to buy foodstuffs, medical supplies, cars, etc.
While CCP China has taken a relatively miniscule role in the global payment system, it is nevertheless growing. Imagine, for example, if some nation rich in rare-earth elements, the critical element of 21st century defense and communications technology, were to suffer a catastrophic earthquake or famine - or if the US and its allies were to impose sanctions for some political reason, like human rights violations.
Assuming electricity is not affected or was restored quickly, CCP China could theoretically deliver financial aid far quicker than could the United States, our allies, and our affiliated non-governmental organizations by sending digital currency to a device directly via its phone number. Navy landed relief helicopters in Fukushima within hours of the Fukushima earthquake, and then seaborne landing craft at Japanese beaches that were chock-full of portable kitchens, hospitals, toilets, flat-pack shelters, and other supplies.
Payments across borders can be sent to a cell phone much easier and efficiently than they can to SWIFT or other interbank payment systems, which require a banking infrastructure to deliver funds. Consequences to the U. As we have seen occasional bond market revolts, where parts of a Treasury auction go unsold until the yield is increased by a higher interest rate i. Friday, the spread between the 2-year and the year Treasury printed at 1.
And it is not beyond the reason to think that continued spending might make yield curve control impossible. Of particular concern is attendance by developing nations where huge swaths of the population are unbanked, but another is visitors who see the technology at work. That is, I believe countries will eventually criminalize the possession or use of Bitcoin and other digital currencies, as I explained three weeks ago, given that it can be exchanged anonymously or pseudonymously.
Criminal justice administrators around the world already have a reasonable predicate to ban its use given its use in multiple serious criminal activities and in tax evasion. I believe the crackdown will come sooner than later - within a few months 90 days? When that happens, the bid for BTC will fall well below the ask and the price will collapse, as the only buyers will be those willing to hold and use a contraband currency.
As I wrote last month, Another risk factor is that while Bitcoin was first-to-market and the most well-known, its value depends on its first-to-market brand name.
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China's digital currency - explained!
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