The Digital Currency War — United States of America against China
The idea of digital currency isn’t new. Biticoin showed how to do it to the world more than a decade ago in the year 2008. However, when it came to adoption of digital currency, governments were in denial. The stance of China shifted about six years when it started its research on developing a digital Yuan that could be used globally.
A digital Yuan –can this make the United States lose another its technological edge?
China outpaced US in filing patents related to the technology and holds about 60% of the total number of patents filed. Blockchain is said to the next revolution in terms of technology after internet and with China holding about 3 times the number of patents than what US holds, has certainly given the Asian country an edge.
Coming back to the digital currency war, currently, the United States Dollar dominates the world’s financial system. China actually aims to redefine the international financial system with digital Yuan and is trying to develop a peer-to-peer system payment architecture which is said to alter the current way the world trades. This in the longer run may end the reign of US dollar in the current financial system.
Let’s understand it with an example –
Let’s fast forward the clock to 2023 and think digital Yuan has been launched. Now countries like Iran who are still getting economic sanctions from US but have shifted their acceptable trading currency to digital Yuan. Now, Iran can sell oil to China, Europe, or Africa, but the US authorities cannot monitor the revenue earned by the trade. This gives an edge to China as it is easy for it to delve into the details of the trade and this puts US in a blind spot.
US dollar hold on the international market
The advent of digital-asset technologies has combined with the Covid19-induced economic crisis to raise nagging questions about whether the dollar’s undisputed reign as the de facto global reserve currency might be due for a reckoning. The dollar accounts for some 62% of global central banks’ foreign-exchange reserves.
When you look at US, Federal Reserve Chairman, Jerome Powell mentioned last year that the US central bank had not identified potential material benefits of a digital dollar. However, when in April Chinese Central Bank announced that it has begun testing the use of digital currency as well as how to store it, the stand of US suddenly changed and the Congress released a statement that they are exploring ways to make digital dollar a reality.
International Monetary Fund and World Bank have played a key role in the post-World-War-II order that helped enshrine the dollar’s premier status. The U.S tender is closely watched in digital asset markets because it’s the most common price denomination for cryptocurrencies like bitcoin and ether as well as the backing for a fast-growing breed of digital tokens known as stablecoins.
It’s worth noting China closely manages the yuan’s exchange rate against the dollar, so a digital version of the nation’s currency — also known as the Renminbi (RMB) — could trade similar to a dollar-linked stablecoin.
China has struggled to increase its currency’s usage in international commerce. Since, 2016, when the yuan was incorporated into an IMF international reserve asset, the Chinese currency’s penetration of global foreign-exchange reserves has doubled to a paltry 2%, as noted by the Bank of America analysts.
Some 63% of Chinese banks’ cross-border claims are denominated in dollars, nearly identical to the proportion for U.S. lenders, the analysts wrote.
The internationalization of the RMB is happening, but the growth rate has been uneven and not as rapid as some may think.
How businesses will benefit from Digital Currency
3,600 customers surveyed by Deutsche Bank in China, France, Germany, Italy, UK and US deduced that the Gen Z wants a purely digital currency.
With digital currency becoming a reality business-to-business transaction will also benefit. Currently, corporates wait almost 70 days for payment from business customers. The number one reason for this is inefficient internal processes which lead to payment delays, something digitization can fix. Moreover, if companies doing business in China are forced to adopt a digital yuan, it will certainly erode the dollar’s primacy in the global financial market.
Many are skeptical about digital currencies citing the large energy needs and point out that currencies such as bitcoin and Facebook’s Libra have encountered significant regulatory hurdles. Yet, if the growth in blockchain wallet users continues to mirror that of internet users, then by the end of the decade, they will number 200 million, quadruple the current level. This will be encouraged by governments, banks, corporates, and payment providers who all stand to benefit from the digitization of payments.