Could China’s Digital Yuan Eventually Dethrone The US Dollar?

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China seems to be miles ahead of the US in eliminating the old-fashioned fiat paper money. Currently, the People’s Bank of China is preparing to test a digital currency dubbed the digital Yuan. Some commentators are convinced that it may kick off a new economic arms race that will challenge the supremacy of the US dollar.

Today, hundreds of millions of Chinese consumers have adopted various cashless payment methods. Most of them use popular apps like Alipay and WeChat. One researcher from the Peterson Institute for International Economics, Martin Chorzempa, said:

“Everything is immensely convenient. You pretty much only need these two apps to do just about anything. You walk into a restaurant, scan a code and order your food. You don’t have to wait for a waiter. All the payments are automatic. It’s quite extraordinary.”

Tech Companies Leading Developments

China’s tech giants, counterparts to Facebook and Amazon, took the lead in creating these payment systems. They surpassed their American counterparts due to necessity since China never started with an established payment system created on credit cards. The chief strategist at Silvercrest Asset Management, Patrick Chovanec, believes that when Amazon started, it never encountered huge hiccups on how people were to pay for the books that they order.

On the other hand, it was a different scenario in china when Alibaba started. Most people did not have credit cards. Thus, the Chinese companies had to improvise to ensure that their customers paid without encountering challenges. Since the tech behemoths paved the way, China’s central bank gained interested and wanted a piece of the digital action.

For the past six years, the bank has been developing a digital currency. However, the efforts escalated last summer when Facebook unveiled its plans to launch its electronic form of money called Libra. Chorzempa commented:

“They are one of the most advanced central banks in the world in thinking about and moving forward on this issue.”

The Rise Of The Digital Yuan

The People’s Bank of China got worried that if almost 2.5 billion Facebook users abruptly had access to electronic currency, China’s digital Yuan could be left in the dust. The bank increased development speeds to complete its design work. Currently, it is allegedly preparing for the first tests of its digital currency.

Early reports reveal that the digital currency will function just like its paper cousin instead of being decentralized like any other cryptos such as bitcoin. Since its value is tied to the regular Yuan, it is expected to be relatively stable. That way, the central bank can monitor all transactions which means that the digital Yuan will not have Bitcoin’s anonymity.

Chorzempa added:

“The term that the central bank officials in China have used is ‘controllable anonymity,’ which is one of the most Orwellian statements one could think about.”

The Libra Factor

While China increased speed after Facebook’s announcement, regulators in the United States hit the brakes. Last July, Jerome Powell, Federal Reserve Chair, told lawmakers that Libra poses many serious concerns surrounding money laundering, privacy, financial stability, and consumer protection. According to the lawmakers, these issues must be thoroughly and publicly scrutinized and evaluated before Facebook is allowed to continue with its Libra project.

Libra has faced criticism from many other industrialized countries. Several of Facebook’s original partners in the venture including MasterCard and Visa have developed cold feet. However, Mark Zuckerberg is undeterred stating that the currency race is an international competition. The Facebook CEO said:

“China is moving quickly to launch a similar idea in the coming months. If America doesn’t innovate, our financial leadership is not guaranteed.”

Princeton University historian who co-authored a paper on digital currency, Harold James, agrees that Zuckerberg has a point. He added that China’s digital Yuan could come to rival the dollar as a form of international payment.

Others are skeptical about the Libra project. Erik Nelson of Wells Fargo Securities commented:

“We’re still in the early stages of this. If China wants to establish itself as the main reserve currency and try and dethrone the dollar, it is going to have to take a lot more steps on the governance front, on opening up its markets to foreign investors.”

Digital currencies can make financial transactions easier, cheaper, and more efficient. However, if they catch on, they may trigger an agitation in the global financial system. Sooner or later it is bound to happen whether sponsored by the Chinese central bank or an American tech giant.

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