The notice also called for strengthened coordination among government agencies, including financial regulators, telecommunications authorities, and internet regulators, to ensure comprehensive enforcement of the ban. Furthermore, payment institutions and internet platforms were instructed to cease providing any services that could facilitate cryptocurrency transactions. Privacy concerns, especially with a controlled government such as China, will not help in increasing adoption of the digital yuan internationally. But given that China is a major trading partner to many countries, it could force the adoption of the digital yuan in cross-border trade as well—although not in the short term. Countries may look to diversify away from the U.S. dollar, boosting the globalization of the yuan.
There has been a revolution in payments traffic since that time, and China is now one of the leading countries in cashless payments. Unlike in other countries, such as the Netherlands and Sweden, in China this development did not originate from the banking system, but it was induced by a few key apps from relatively young Fintech companies such as WeChat (Tencent) and Alipay (Ant Financial). These parties, that form a kind of extra layer between the banks and their customers, now have a collective market share of more than 90% in Chinese payments cashless retail payments. The Chinese cashless payments system is already able to settle approximately 100,000 transactions per second.
If people have easy access to a private stablecoin, it could actually in a sense reduce the role of the national currency. Something similar actually happened in Zimbabwe, where confidence in the national currency completely vanished as a result of hyperinflation and people turned en masse to foreign currencies such as US dollars and South African rand. In such a situation, the national central bank loses control of monetary conditions in its own country. Importantly, however, the DCEP could also be used by China to interfere with monetary sovereignty in other countries. However, it should be noted that digital currency is not yet live on any public ledger; it is controlled mainly by regulatory bodies and can be changed at the whims of political decisions. The central bank is not expected to act in the function of a peer-to-peer provider for the DCEP, but instead requires the use of officially regulated financial intermediation for the distribution of the digital version of its currency.
Of course we may expect that, once the digital renminbi takes off and gains traction, other central banks will react strongly. Especially the US will be determined to hold on to the dollar’s international dominance. The US authorities will soon understand that a successful digital renminbi may in the long run turn out to be a larger threat to the position of the dollar than the euro ever was.
This Chinese resoluteness also shows that China is working very actively on strengthening the renminbi’s international position, with the central bank and companies such as Huawei working closely together to achieve this. While still a long way off, a scenario in which first parts of the African, but later maybe Asian, Latin American of even some European economies will use the renminbi for cross-border and in due course also domestic transactions is gradually becoming more plausible. China is leading internationally with the introduction of CBDC, and is clearly moving in a different direction than many other countries considering a similar move. The debate in Europe is still mainly about the form the digital euro, its CBDC, should take, the question of whether there is consumer demand for it, and who should pay for it. The Chinese authorities are taking a more strategic approach, and most of all from the perspective of whether a digital currency can contribute to strengthening/entrenching China’s international position.
According to a report by the National Committee of Experts on Internet Financial Security Technology, from January to July 2017, 43 ICO platforms were established in China, raising an estimated 2.616 billion yuan (approximately $394 million USD at the average exchange rate in 2017). The report also highlighted the prevalence of “fraudulent ICO projects” (欺诈性ICO项目) and “pyramid schemes disguised as ICOs” (以ICO为名的传销活动), emphasizing the risks to investors and the potential for financial instability. The price of the CBDC is exactly equivalent to the national currency of which it is just a digital version. Indeed, in countries where national currencies are hit hard by inflation, the value of the CBDC collapses with the value of the official currency.
The advent of the Digital Yuan, particularly with its unique expiry feature, is set to create significant ripples in the Chinese consumer market. Primarily, it represents a paradigm shift in the way individuals perceive and handle money. The traditional idea of money as a safe, permanent store of value is challenged by the temporal nature of the Digital Yuan.
Morgan Stanley predicts that the Chinese yuan will account for 5 to 10% of global foreign exchange reserves by 2030, from 2.1% in September 2020, promoting prospects for the Chinese yuan as a global settlement currency. The impact of the digital yuan may not be that significant in the near future for companies with manufacturing or trading operations in China given that this currency is in a pilot stage and focused mainly on individual consumer adoption. DCEP is the digital version of the yuan, China’s physical currency, and it’s legal tender in the country, being issued by the central bank. In a centralised system, the People’s Bank of China (PBoC) would issue DCEP to commercial banks against equivalent cash or banks’ deposits at the central bank.
One may also expect China to try to get all countries involved in its Belt and Road Initiative to use the DCEP and therefore the renminbi. Today, the renminbi is still a small currency in comparison to the euro and most of all the dollar. In the context of a situation in which the euro’s international position has more or less stagnated over the last decades, this is at the very least somewhat disconcerting. In short, while the US and China are both talking seriously about decoupling, the digital yuan – which is now a reality – indicates that China’s government is not only more effectively planning for it, but will be the first to fully sever all ties with the US… Actually, not just “exploring” but thanks to year of testing and partial rollouts, Beijing was about to become the first country in the world set to launch the digital yuan, and with both the IMF’s and SWIFT’s blessing, we said that it was “just a matter of months if not weeks.” It also gives the Chinese government a new way to surveil the population, creating new data which can be tracked by authorities, which could be especially useful as other cryptocurrencies like Bitcoin have pseudonymous protections for user privacy.
With its centralization, CBDC offers states the power to control their citizens’ finances as well as their freedoms. Thanks to the decentralized and deflationary nature of Bitcoin, for example, this crypto is a powerful remedy against inflation in the long run and a powerful tool for the defense of human rights. Although China does not have free cross-border capital movements, capital flight is a common and substantial phenomenon. For example, internationally trading Chinese companies can for instance manipulate invoices, as a result of which money can be transferred abroad.
