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I hope the first part of this new mini-series about China's digital currency was interesting enough to give you the thirst to follow my next posts on this subject. If you haven't read it you can find it here All you need to know about China's new digital currency - Part. 1. To provide you with a quick sum-up, I talked about Alibaba and Tencent and how they managed to gain a relative total monopole of the market. Now, I will continue with the second part.
Combining financial services with e-commerce and social media profiles in real time, creates such strong synergies that traditional institutions simply cannot compete with them. And top things off, few months back, Jack Ma, from the Alibaba group, even expressed in his now infamous speech that he thought that the lost traditional financial institutions have to operate under, like strict rules on the amount of cash banks have to keep in reserves, in order to avoid potential bankruptcy, well those outdated regulations should not apply to innovative tech companies like his own. Obviously, all of these is causing a huge systemic challenge to the Chinese government, because while this payment platforms like Alipay for example, of course have to follow local rules and laws and regulations, there is essentially a black box run by a single for profit company that can make up rules of his own as it goes and through that it can effectively control a huge chunk of the economy of the country. They can decide over who gets to have an account with them, which merchant is allowed to get pair for and what platform, who can take out the loan etc., essentially replacing not only financial institutions, but starting to think of the many of the functions of the government.
Now, on top of that the Chinese government was also becoming increasingly weary internationally. In 2019, the vice-president of the China Center for International Economic Exchanges explained why he thought the country needed an alternative to the SWIFT system. The SWIFT, if you did not know, is an organization that handles the communication for the majority of international bank transfers. Basically, most of the time, somebody wants to make an international transaction, they send the message to SWIFT, who processes it and sends it to the right recipient. The problem is that not only is the system ancient and slow, the organization does most of it processing in Europe and the United States and the US in particular has used SWIFT in the past to spy on transactions using the NSA, it has ceased transactions between citizens of third party countries like Germany and Denmark that it had deemed unlawful and in the case of Iran, blocked Iranian banks from the system altogether as a part of their economic sanctions.
China, especially since the start of its trade war with the United States, sees its reliance on the SWIFT system as a major source of danger for its sovereignty and thinks that the system could be used to essentially cut it out of the internationally financial world altogether. And, finally, China also started getting increasingly nervous about crypto-currencies as, on the long term, those could potentially replace the Yuan altogether, leaving no control over its currency in the government's hand at all. And while it has not made owning and investing into such currencies illegal in the country so far, it has banned crypto-currency exchanges and banned the crypto-currencies themselves for being used as money to pay for things in the country.
So these were the three major threats that the Chinese government was facing. On the short term, its own domestic tech giants were gobbling up the entire finance industry of the country, on the medium term, the United States government could potentially cut it out of international transactions and a couple of years down the line, crypto-currencies could become a real danger to their control over the economy. And so to address them, China decided to turn to the digital Yuan project among other things. Starting with its most urgent domestic priorities, it designed the DCEP to specifically combat mobile wallets by giving it not only the convenience of those wallets, but also many of the characteristics of a national currency: like the regular Yuan, digital Yuan is issued by the People's Bank of China and can be withdrawn by them as well. The value of the two is designed to match as they are supposed to be freely exchangeable. Interestingly, the DCEP is also supposed be usable even without an Internet connection, just like cash, so two users in a remote part of the country could transact on their phones and their transactions would sync back up once they got online again and importantly the DCEP is also designed to be a legal tender, again, just like cash, meaning that legally speaking everybody taking digitally payments in the country would have to accept it as a payment method once and rules out.