US Dollar Faces the Threat of Being Displaced by China’s Digital Currency

From a dictation of a blanket ban on all crypto activities and digital currencies as tools for retail payments, including access to international exchange platforms in 2018, to recent declaration of the People’s Bank of China (PBOC) to launch a central bank-backed digital currency (CBDC) by November 11, 2019, China has come a long way. The logic behind the move is to “protect” its foreign exchange sovereignty, but China’s intentions of competing with the dollar came to the fore in 2015 itself when the IMF acknowledged Renminbi as a “reserve currency,” and added the RMB, to its Special Drawing Rights basket in October 2016. Tired of having its financial stability tied to the United States’ monetary system, China had many times advocated a super sovereign currency to replace the US dollar hegemony.

A digital currency backed by the Chinese yuan could dampen the dominant influence of the US dollar on global trade, as tensions continue to rise between the US and China amidst trade war. Jeremy Allaire, CEO of American cryptocurrency financial service firm Circle, says, “China digital currency would be as safe as central-bank issued paper notes, and could be used on platforms such as Tencent’s WeChat and even without an internet connection.”

The advantages of digital currency

It will let merchants receive payments instantly, ensure banks of the creditworthiness of borrowers, and minimize transaction fees in addition to being a more efficient instrument to track bribery, money laundering, and other transactions. China’s strategy is to integrate more closely with the rest of the world. Digital currency is just one of the means to have a more internationalized renminbi.

According to analysts, China’s new digital currency could encourage extensive use of the yuan. With the superiority of China over the US on crypto innovation, China’s digital currency could pose a severe challenge to the US dollar. Currently, the US dollar is the world’s “reserve currency.” According to the IMF, approximately 58 per cent of all foreign exchange reserves in the world are in US dollars, and roughly 40 per cent of the world’s debt is denominated in dollars.

People’s Bank of China (PBOC) intends to launch its digital currency through a two-tier system, under which both the PBOC and commercial banks would be legitimate issuers. In the beginning, seven institutions will receive the digital currency, and they are the largest banks in the world, the Industrial and Commercial Bank of China and the Bank of China respectively; the Agricultural Bank of China; two largest financial technology companies of China, Alibaba and Tencent; and Union Pay, an association of Chinese banks. The recipient institutions will then disperse the digital currency to the Chinese citizens and others doing business in the Renminbi, China’s fiat currency. The money will ultimately be made available to consumers in the United States and elsewhere through relationships with correspondent banks in the West.

No doubt China is curating its yuan to be a ‘world currency’. If they mandate its use for all cross-border transactions, then it could become quite large. A government-backed stable digital currency like China’s Digital Currency Electronic Payment (DCEP) can overcome all challenges and facilitate a new, entirely open peer-to-peer payment system. A peer-to-peer version of electronic cash would send online payments directly from one party to another without the need of a financial institution. Such a new, open payment infrastructure will encourage further innovations.

According to analysts, if US regulators do not take the initiative in Cryptocurrency in the US, China’s Digital Currency may strategically emerge as the de facto global digital currency in emerging economies, mainly through WeChat, Alipay, UnionPay, and other messaging & payment apps. WeChat is quite popular, with more than one billion monthly active users, and Alipay has 1.2 billion global annual active users. With mobile money accounts nearly doubling year over year, China is at an advantageous position vis-à-vis the USA in digital currency.