Bitcoin may have surpassed $40,000 USD this week but, watch out–there’s a new kid emerging on the cryptocurrency block. China.
This week, the People’s Bank of China began another round of testing for its digital currency–the digital yuan. Its efforts are being hailed as the most advanced in the world.
On Thursday, the government in Shenzhen, China distributed 100,000 digital red gift packets to its citizens via a lottery system. Each packet is worth 200 yuan and recipients have until January 17 to spend the money at various stores and e-commerce sites. All recipients have to do is download the government’s digital yuan app to their smartphones.
The Chinese digital program is considered the most robust test for a digital sovereign currency in the world thus far, and puts China the closest to launching the first-ever government-backed digital currency.
China began work on its digital yuan in 2014–and, it’s clear, the U.S. has some catching to do.
The Rise of the Sovereign Crypto Currency
In recent years, there have been growing concerns at the top echelons of the world’s biggest superpowers about the popularity of crypto-currencies like bitcoin, as well as Facebook’s Libra. As such, the creation of sovereign (and therefore, monitored) digital currencies has become a priority for governments seeking ways to combat the rise of the private, opaque marketplaces for digital transactions.
Widespread use of a digital yuan would certainly give Chinese officials and policy makers greater visibility into how money flows in and around China’s economy. It would also enable China to be able to track and trace any illicit flow of funds, including money laundering and terrorist financing. In addition, the currency would enable the Chinese to target specific economic classes and regions with monetary policy interventions. In sum, it’s certainly an ideal arrangement for a big-brother country looking to implement some more big-brother technology and rid its system of cash.
But, the Chinese are not just creating this for China.
The problem for the rest of the world (and certainly for the U.S.) is the reality that a popular, widely-used digital yuan could help China realize its goal of becoming the world’s dominant and reserve currency. Indeed, China has already said it intends to encourage the adaptation of its digital yuan in international trade.
The U.S. Dollar Under Threat
Since the Bretton Woods agreement of 1944, the U.S. has been the world’s reserve currency. The U.S.’s ability to borrow is highly correlated with this status as the world’s reserve currency. When times get tough, people pour into the safety and security of U.S. treasuries, dollars and other assets. But, what if money flowed into China instead?
That, indeed, is the concern and the U.S. government is finally beginning to wake up to that reality.
This past summer, the Senate Banking Committee held a hearing on the future of a digital dollar. The hearing was held, in part, as a response to the advances China has been making, as well as growing concern about Facebook’s Libra program. By Fall, the U.S. Federal Reserve Bank said it was working on the creation of a digital dollar.
According to the President of the Cleveland Federal Reserve bank, “legislation has proposed that each American has an account at the Fed in which digital dollars could be deposited, as liabilities of the Federal Reserve Banks, which could be used for emergency payments.
She also said, there were to “create a new payments instrument, digital cash, which would be just like the physical currency issued by central banks today, but in a digital form and, potentially, without the anonymity of physical currency.”
So what are we waiting for?
The distribution of individual payments tied to the coronavirus relief package certainly could expedite the importance of creating an easier method for distributing government funds, meanwhile, the need to compete with China on this front is of growing importance.
First Mover Advantage: Will it Matter?
Though China may be the first to implement a digital currency, ultimately, China’s platform may have little international appeal.
After all, would you trust your money in the hands of the Chinese CCP?
At issue, China’s fundamental lack the basic property rights and free speech. The Chinese government is seen as an entity that can take away just as easy as it giveth. Consider the recent concerns over Alibaba’s Jack Ma who has remained out of public view since his aggressive comments on his nation’s government? Two months ago, the popular founder of the e-commerce giant disappeared from public view after giving a speech in which he criticized the Chinese government of stifling innovation.
Investors need to trust the institution (or, in this case, the country) in which they have their money. China has not earned our trust.
And, I don’t know about you, but I’m not about to start undoing Bretton Woods.