Digital Yuan: A Threat To Bitcoin and USD

October 29, 2020

"If there is a government pushing another cryptocurrency that's even more open, freer, has fewer restrictions than Bitcoin, and is faster and cheaper to use, then that would threaten Bitcoin. But that is good for the industry, it's something better than Bitcoin and would replace it." - Changpeng Zao (Binance chief executive)

Chief Executive of Binance, Changpeng Zao, believes that a central bank digital currency designed will be enough to threaten Bitcoin. China's central bank has soared their advances after launching the world's first major sovereign digital currency. If the Chinese central bank's made digital yuan succeeds, the future could be something like that for everyone.  

When did this all started?

Central Bank Digital Currency (CBDC) of China was inspired by Bitcoin and other blockchain-based cryptocurrencies. In 2014, the central bank has been working on a project called “DC/EP”: Digital Currency/Electronic Payments. At the end of 2017, the People's Bank of China organized several banks and institutions to formulate a Digital Currency Electronic Payment system. They started to be tested in four Chinese big cities in April 2020, which includes Shenzhen, Suzhou, Xiong'an, and Chengdu.

A central bank digital currency would be executed through a database operated by the central bank, government, or approved private-sector entities. Unlike cryptocurrencies, a central bank digital currency would be centrally controlled (even if it was on a distributed database), and so a blockchain or other distributed ledger would not be required or useful - even as they were the original inspiration for the concept.

Digital fiat currency is part of the base money supply, together with other forms of the currency. DFC is a liability of the central bank just as a physical currency is. It's a digital bearer instrument that can be stored, transferred, and transmitted by all kinds of digital payment systems and services. The validity of the digital fiat currency is independent of the digital payment systems storing and transferring the digital fiat currency.

Benefits and Impacts:

Technological efficiency: instead of relying on intermediaries such as banks and clearinghouses, money transfers and payments could be made in real-time, directly from the payer to the payee.

Financial inclusion: money accounts at the central banks are safer and could make up a powerful instrument of financial inclusion, that will allow legal residents or citizens to be given a free or low-cost basic bank account.

Preventing illicit activity:  possible for a central bank to keep track of the exact location of every unit of the currency. Tracking can be extended to cash by requiring that the banknote serial numbers used in each transaction be reported to the central bank.

Tax Collection: tax avoidance and tax evasion are much more impossible.

Combating crime: can easily spot criminal activity, thus, put an end to it. Additionally, if criminal activity has already happened, tracking makes it difficult to successfully launder money.

Protection of money as a public utility: digital currencies issued by central banks would give a new variation to real cash.

Safety of payment systems: a secure interoperable digital payment instrument administered and regulated by a Central Bank strengthens privately controlled money systems and boosts trust in the whole national payment system.

Preservation of seigniorage income: in regards to the disappearance of physical cash, CBDC would prevent a foretell reduction of revenue for governments.

Banking competition: it could strengthen competition between banks to attract bank deposits.

Monetary policy transmission: the dispensation of central bank base money could establish a new channel for monetary policy transference through transmitting to the public.

Financial safety: CBDC would limit the practice of fractional reserve banking, deposit guarantee programme will be less needed as well.

China Citizens' Mass Adoption of Digital Yuan

China has gradually tested its first central bank-backed digital currency early this year, known as DCEP, or "digital currency electronic payment."

According to BBC News, China's central bank successfully distributed 10 million worth of digital yuan via lottery to 50,000 random people in the city of Shenzen. Approximately two million people have joined to take part in the lottery. People who received "red pockets" containing a digital yuan currency worth 200 yuan could spend at more than three thousand stores.

Digital Yuan is China's way for a cashless community. Moreover, it is also a part of China's goal to globalize RMB across foreign countries. DCEP is not a crypto-currency, but a digital copy of China's yuan currency, which is issued and supported by the central bank.

Unlike Bitcoin and other digital currencies that varies wildly based on speculation, DCEP will be as stable as the physical yuan. Digital yuan could terminate the need for both physical cash and online payment services, and another challenge for global dominance against the US.

Another crypto user Chandler Guo told BBC in August,

He also explained that China wants to share that power with others and the brink of becoming a cashless society.

Based on DW's article, the People's Bank of China (PBOC) strives to use the currency for the next Winter Olympics, scheduled for February 2022 in Beijing. The banks will distribute DCEP to their customers who can download the currency from their bank accounts into digital wallets, similar to cashing out at an Automated Teller Machine (ATM). Through the use of DCEP, it would be possible for consumers to make contactless and instant payments to anyone who uses the service.

Dominance over the US dollar

Administering a digital sovereign currency could be one way to regain power over domestic economic transactions. It will also allow China to become more competitive in this domain, and develop new technological standards on the change to a digital currency.

Alexander Badenheim, Senior Project Manager of Konrad Adenauer Stiftung says that,  

"hope to create its own international payment architecture, something comparable to SWIFT."

According to the International Monetary Fund, over 60% of known central bank foreign exchange reserves are in US dollars, thus, making it a de facto global currency. Moreover, the euro ranked 2nd global currency with 20% of global reserves.

A broad grasp of a digital yuan could lead to central banks similarly holding reserves of DCEP. This would give the Chinese central bank a tremendous impact over global financial markets as they serve as the only provider of DCEP. Thus, giving China a firmer stance for itself and digital yuan to compete with the USD.

The US doesn't seem to in a hurry to launch a digital dollar, but the US will fall under China if it doesn't act soon.

Legalization of Digital Yuan

According to news.bitcoin.com, China drafted a law on Friday this month, to legalize Digital Yuan and possibly outlaw competitors.

The law states that:

Digital space rivalry

Because of this, China's successful launched of digital yuan might not be enough to ensure its goal of becoming a global digital currency leader. 

On October 2, The European Central Bank planned to prepare for the launch of a digital euro in the European Union, where data protection has long been top of mind in policymaking. 

Moreover, Libra from Facebook, a social media platform has aimed to offer a privately run, global currency to its over 2.7 billion users.

Risk Factors:

A general concern is that the development of a CBDC the market would develop potential bank runs and therefore will make banks' funding stance weaker. Moreover, the Chinese state could possibly abuse its digital currency by tracking the transactions of its own citizens, and also any other institutions or countries that would adopt the digital yuan.

What matters here is that how digital currency will give an impact on the future of the international economy and how will be the future's payment system, will it be through the use of digital currency, or physical cash?

And in regards to digital yuan, will the people be willing to accept the potential risk in tracking their financial transactions by China?

Will China be able to reach its goal to internationalize digital yuan across foreign countries and create a cashless society?

Is digital yuan really a threat to Bitcoin and to the US dollar?

Comment your answer below.




Sources:
https://en.m.wikipedia.org/wiki/Central_bank_digital_currency

https://www.google.com/amp/s/amp.dw.com/en/china-digital-currency-yuan-bitcoin/a-55134692

https://news.bitcoin.com/china-law-legalize-digital-yuan/