China’s Crypto-Key to Currency Supremacy
China is close to releasing what might be the world’s most influential digital currency.
In 2018, non-cash transactions totaled 3.8 quadrillion yuan (540 billion USD), with over 59 trillion yuan (8.4 trillion USD) being processed by WeChat and Alipay, an exponential increase from years past.
Today, the digitization of cash in China has allowed there to be an entirely cashless ecosystem, enabling companies from small to large scale corporations to take payments in the form of Alipay or WeChat Pay. The increasing competition of cashless transactions by major corporations and the private monitorization of transactions has become a major concern for the People’s Bank of China (PBOC). As a result, China has been developing its own central bank digital currency (CBDC), also known as a DCEP (digital currency electronic payment).
The Development of China’s CBDC
Facebook’s cryptocurrency, Libra, has increased the Chinese government’s drive to release its own digital currency as soon as possible. Libra is a blockchain cryptocurrency that differs from Bitcoin and others like it by being backed by tangible assets: a mix of national currencies such as the US dollar, the Euro, and other strong currencies making up the Libra Reserve. This reserve allows Libra to have low volatility, creating a ‘stablecoin’. Through this, Libra becomes a more dependable cash substitute, utilizing both blockchain technology and a near central bank level of reliability, which makes it a feasible world currency of the future. Being heavily reliant on Western currencies, if Libra becomes the digital currency of choice, China’s Renminbi will lose its importance and will hurt the Renminbi as an influential global currency. If Libra becomes the next global currency, the benefits of faster transactions and borderless money transfers will threaten the sovereignty of all central bank currency in the future, sparking discussions of digital currency among many central banks.
WeChat Pay and Alipay are transaction giants in China. China’s private sector is dominated by these companies, with WeChat currently taking up 34% of China’s total mobile traffic with over 1 billion users, and Alibaba being China’s largest online commerce company. These companies have been controlling the digital payment industry, with many people preferring these services to bank or credit card online services. However, instead of fighting the industry and trying to cannibalize the WeChat Pay and Alipay’s control over digital transactions, China is working with the e-commerce giants in the development of its own digital coin (YAHOO). By working with the current digital transaction oligopolies, the release of the centralized digital currency will have the knowledge and years of experience of digital services backing it.
China’s CBDC — Is it Feasible?
Digital currencies will encourage higher numbers of transactions due to its ease of use and instantaneous nature. Since many people in China already utilize mobile payments (16% of China’s GDP), it is clear that there is not only an existing market, but one that holds serious growth potential. One concern for a CBDC is if it will become obsolete and unutilized such as Venezuela’s CBDC Petro. This currency wasn’t accepted by many vendors and international trade partners, making it unrecognized and undesirable. China differs by having more resources and a clear market of which to implement the currency. China’s market dominance internationally and domestically gives it more power to implement the currency.
Moreover, CBDCs have been disputed based on how it will affect the economies of the countries utilizing them. If a CBDC becomes popularized, consumers will no longer have to use banks to complete digital transactions, allowing them to simply use federal digital currency to make most transactions. If this results in fewer deposits, then banks have less to lend, and interest rates in lending will go up, hurting major banks. However, China’s government owns the big four commercial banks, in addition to its central bank. This means that the issuance of China’s CBDC can be adjusted and made to benefit the banks instead. By working with commercial banks, China can introduce this CBDC with an interest that positively affects the banks instead of reducing deposits.
China’s CBDC versus World Currencies
“The CBDC’s introduction could establish the yuan as an international currency, one that leapfrogs the U.S. dollar as the world’s premier international currency.”
-CEO and Founder of tech-company Circle, Jeremy Allaire
China’s CBDC gives a way for transactions to be made in real-time. By giving the option of digital transactions without the need for an intermediary, a crypto-renminbi would have many advantages over paper currency. Currently, cross-border payments are expensive. With the present global banking system, the cost of mailing cash is significantly cheaper than sending cash digitally. Furthermore, digital transactions can only take place in countries with formal financial institutions. The introduction of a blockchain-based CBDC would allow for the exchange of funds from anywhere in the world instantaneously — a difference of seconds versus days. If the digital yuan can be introduced successfully, it could become the next dominant global currency and extend China’s influences to developing countries without a banking system. This would lead to businesses being able to make digital transactions through China’s CBDC, benefiting the development of business in countries without banks and further internationalizing China’s Renminbi. Currently the eighth most traded currency in the world, a successful launch of this coin could put China’s Renminbi on top. The Chinese government has already mandated that all companies allowing digital payments must now also allow the use of China’s new digital currency. This will make the crypto-Renminbi, when it releases, the most widely accepted digital currency in the world.
Notably, this would allow the government to monitor transactions with high precision, giving the government greater insights to consumer spending than any other country. Not only would this lower fraud and crime rates, but a successful CBDC would also allow the government to look into the economy and make decisions with higher accuracy. A permissioned blockchain gives China the ability to see every transaction and validate them. If the ease of this CBDC allows for the Renminbi to become the next global currency, then this could give unprecedented power to China and its banks.
Without much information and without a timetable, the official release date of China’s CBDC is unknown. China is scheduled to release a trial run of this currency in Shenzhen and Suzhou by the end of 2019. If these test runs are successful, China will undoubtedly release this currency to the public within the next year. With this in mind, everyone should be prepared for a new era of digital currencies.
SOURCES
[1] https://qz.com/1747988/pbocs-digital-currency-has-yet-to-launch-bank-warns-of-frauds/
[3] https://www.bloomberg.com/news/articles/2018-12-13/china-s-plan-to-sideline-bitcoin
[6] https://www.bankofcanada.ca/2019/05/staff-working-paper-2019-20/
[8] https://www.nytimes.com/2019/06/18/technology/facebook-cryptocurrency-libra.html?module=inline
[10] https://www.economist.com/leaders/2019/06/22/facebook-wants-to-create-a-global-currency
[12] https://www.nytimes.com/2019/10/18/technology/china-cryptocurrency-facebook-libra.html
[13] https://www.ledgerinsights.com/china-central-bank-digital-currency-cbdc-renminbi-dollar/
[14] https://www.ibm.com/blogs/blockchain/2019/10/central-bank-digital-currency-explained/
[15] https://finance.yahoo.com/news/tencent-reportedly-creating-team-chinas-114352982.html
