China’s digital currency rollout could be a model for the West

This month, during the Winter Olympics in Beijing, China is set to showcase its digital yuan to the world, becoming the first major global economy to roll out a central bank digital currency (CBDC). From Feb. 4, foreign nationals will be able to convert foreign currency into digital yuan, according to reports, and will receive a physical card to use during their stay.

Centralized digital currencies are an emerging geopolitical trend and have grown in popularity as a reaction to the cryptocurrency craze like Bitcoin. Several smaller states have already introduced their own CBDCs, such as the Bahamas with the Sand Dollar and Cambodia with the Bakong. However, economic giants such as the US and UK are lagging behind, despite their strong interest in pursuing CBDCs.

The digital yuan will face its biggest test yet at the Beijing 2022 Winter Olympics

The UK launched a task force in April 2021 to examine the viability of launching a CBDC, although the House of Lords last month said there was no compelling case for one. Meanwhile, the US Federal Reserve’s January white paper outlined pros and cons, but ultimately took no position. He preferred, on the contrary, to leave the decision to a divided Congress. Indeed, a digital dollar is a few years away.

China, meanwhile, has been exploring digital currencies since 2014 and has conducted several trials of its Digital Currency Electronic Payment (DC/EP) – the official name for the digital yuan. It has also distributed millions of dollars worth of digital currency in trials in several Chinese cities, including Shenzhen, Chengdu and Suzhou. In these trials, local government agencies distributed yuan through a lottery, and users had to download an app to receive them.

As the world’s major economies falter, central banks and policymakers can now look to China and its digital yuan as the definitive model for CBDCs.

What is a Central Bank Digital Currency (CBDC)?

The first thing to keep in mind is that CBDCs are a form of fiat currency digital asset, while Bitcoin is a digital token created with cryptographic tools, says Anton Chashchin, Managing Partner of Bitfrost.io. He points out that one of the fundamental characteristics of cryptocurrencies is their decentralization; with recorded and anonymous transactions on the blockchain, they operate outside the control of a central authority.

“It’s reasonable to think that any government-backed coin negates that premise and may even centralize cryptocurrencies,” Chashchin says. Unlike cryptocurrencies, like Bitcoin, the digital yuan is not blockchain-based, although it allows transactions to be verified without the need for banks. With the digital yuan still in its infancy, Chashchin thinks it’s possible that China will reconsider this stance and move to blockchain in the future.

The expansion of interest around CBDCs coincides with a broader crackdown on blockchain-based cryptocurrencies. In India, for example, the government is developing a digital rupee while imposing a 30% tax on income from digital assets. In May 2021, China also reported a deeper push against cryptocurrencies, targeting cryptocurrency mining as well as exchanges. The government has also introduced measures prohibiting banks and financial institutions from providing cryptocurrency-related services.

Chashchin explains that cryptocurrencies uniquely limit central bank control over the flow of funds. To reduce competition for a convenient, regulated and controlled digital yuan, he adds, it was a good idea to ban cryptocurrencies. opportunities for the infrastructure of the crypto world, just as other countries are beginning to launch into space and explore the benefits of this technology,” he says. It is possible that China will bring back cryptocurrencies, but only after fully implementing the digital yuan and forming the basis of the mechanism for its control.

Centralized currency, centralized power

That CBDCs are centrally controlled speaks to stark political differences between the US and China, with Chashchin dashing hopes about whether Western nations can learn from China, and vice versa. This is because everyone has different financial systems, built over decades, which means they will need to approach CBDCs differently depending on their legal frameworks.

The digital yuan is part of the redirection of China’s payment system away from private tech companies and towards a combination of government and banks, says Aaron Klein, senior fellow at the Brookings Institution.

That means it’s not hoping to export China-based digital wallets like Alipay and WeChat Pay in hopes of becoming as ubiquitous as the Visa, MasterCard and American Express networks. Instead, there is a desire to reorient China’s internal system to focus on a central bank digital currency managed by digital wallets more directly tied to China’s banking system, Klein says.

“I think the digital yuan will be integrated with AliPay and WeChat payment systems so that consumers and businesses still ride on those technology rails, but pay with government money,” he predicted.

He doesn’t think, however, that China’s experience has much in common with that of the United States. Klein thinks the United States has used a form of “CBDC” for a very long time, the difference being that the first “C” stands for commercial instead of central. Commercial bank digital currency is what is used with debit and credit cards, he says. “We have a system that is very rich and rewarding for wealthy consumers who earn large, tax-free grants through the platinum, sapphire and other line of rewards cards,” Klein explains.

Just on the money

There are four main motivations behind the digital yuan, says Forrester analyst Meng Liu. China aims to defend the yuan’s sovereign position against cryptocurrencies and break the dominance of tech giants like Alibaba and Tencent over consumer data. It also seeks to expand financial inclusion and accelerate the internationalization of the yuan.

Contrary to the perspectives of Chashchin and Klein, Liu thinks Western powers should closely monitor this implementation. “The United States can learn from China how to design and implement a retail CBDC and learn from the failures and successes of implementing the digital yuan in the real world,” he says. Although the chasm in terms of financial policies and systems is hard to ignore, the United States could learn to encourage citizens to develop and try any CBDC it develops by implementing some of the Chinese techniques. For example, he would not have to rely on trial-and-error test cases if he studies the results of various Chinese experiments. This could speed up deployment.

A payment terminal in China in front of an AliPay sign

Klein predicts that the digital yuan will be integrated into existing digital payment systems like AliPay and WeChat Pay

Failure to accelerate plans, however, could see the United States fall behind. The Federal Reserve recently warned that the advent of digital coins in other countries could lead to a reduction in the use of the US dollar, if they are deemed more attractive. Liu explains that if the Chinese economy is already the second in the world, the yuan represents only about 2% of the world’s foreign exchange reserves. Efforts to internationalize the yuan over the past decade have had limited success, as China strictly controls capital outflows.

“While the digital yuan does not solve all of these problems, its digital, programmable and loosely coupled nature will allow more efficient tracking of capital flows, which could lead to a relaxation of capital controls,” he points out.

Testing the digital yuan in cross-border payment scenarios, such as the recent “m-CBDC Bridge” project with regulators in Hong Kong, Thailand and the United Arab Emirates, shows China’s ambition to boost the use of its digital currency in global transactions. It also illustrates how it aims to set a new standard for CBDCs, which could accelerate the internationalization of the yuan. These measures would certainly stimulate the circulation of the yuan in world trade. He doesn’t think, however, that this will be enough for the yuan to become the world’s reserve currency. This, he counters, would depend on various additional factors, including a country’s strength in the global economy, technological might, military might, among others.

As China continues its experiment, alarm bells are ringing faintly in Washington as the possibility of China’s CBDC challenging the power of the global dollar-based financial network comes under scrutiny. More importantly, China is collaborating with other countries to develop new digital standards, and countries without convincing plans will have no voice when it comes to shaping this technology.

Although China’s approach differs from that of others, due to differing legal and financial frameworks, the West could still benefit from careful consideration of the evolution of the digital yuan as it formulates its own price sheets. CBDC road. Policymakers remain divided on this issue, however, and it could even take years to decide whether a CBDC is necessary. Ultimately, the US dollar — backed by its security as the world’s reserve currency in combination with the nation’s long arm of global military might — won’t feel threatened just yet.

Featured Resources

Outlook 2022: Five Priorities for Boards, Management and Governance Professionals

What drives the future of governance

Free download

Oracle Analytics for Dummies

No data overload

Download now

Content Syndication Isn’t Dead, But Your Data Processes Could Be

It’s a new (lead) generation

Free download

Seven main use cases for machine learning

Seven Ways Machine Learning Solves Business Problems

Free download

About Ruben V. Albin

Check Also

OFAC Imposes First-Ever Sanctions Against Virtual Currency Mixer – Export Controls and Trade and Investment Sanctions

To print this article, all you need to do is be registered or log in …