This scenario may seem far-fetched given the long-standing dominance of the dollar. But in late April, China reached a significant milestone: after more than five years of research by its central bank, China became the first major economy to conduct a real-world test of a national digital currency. The pilot project, which is occurring in four large Chinese cities, is a clear sign that China is years ahead of the United States in the development of what is likely to become a central component of a digital world economy.
U.S. policymakers are unprepared for the consequences. The advent of digital currencies will degrade the efficacy of U.S. sanctions, limiting the country’s options to respond to national security threats from Iran, North Korea, Russia, and others. It will also hamper the ability of U.S. authorities to track illicit financial flows. And China, meanwhile, will use the combination of its digital yuan and strong electronic-payment platforms (such as Alipay and WeChat) to expand its influence and reinforce its capacity for economic coercion in Africa, the Middle East, and Southeast Asia.
State-media outlet China Daily said it had been formally adopted into the cities’ monetary systems, with some government employees and public servants to receive their salaries in the digital currency from May.
Sina News said the currency would be used to subsidise transport in Suzhou, but in Xiong’an the trial primarily focused on food and retail.
A screenshot purported to be of the app required to store and use the digital currency has been circulating since mid-April.
Some reports also claim businesses including McDonald’s and Starbucks have agreed to be part of the trial, however in a statement Starbucks told the Guardian it was not a participant. McDonald’s been contacted for comment.
Digital payment platforms are already widespread in China, namely Alipay, owned by Alibaba’s Ant Financial, and WeChat Pay, owned by Tencent, but they do not replace existing currency.
Xu Yuan, associate professor at Peking University’s national development research institute, told broadcaster CCTV that because cash transactions were offline and transaction data from existing payment platforms was scattered, the central bank was unable to monitor cash flow in real time.
from Voice of America!!!!
China’s Digital Currency Takes Shape; Will It Challenge Dollar?
By John Xie
April 25, 2020
To some experts, the digital currency could represent a serious threat to an American asset that has reigned unchallenged for decades: the U.S. dollar.
The dominance gives Washington enormous power — even in issues that have little to do with finance. Because a linchpin of the global financial system is in New York, where dollar-based payment systems process trillions in transactions, the U.S. government has global muscle in enforcing sanctions.
despite China’s complaints over the dollar’s supremacy, Beijing has built its wildly successful economy around it. China gains most of its dollars by exporting goods to the United States. Chinese companies take those dollar payments and exchange them with the central bank for Chinese yuan to pay their workers. The central bank keeps those dollars in reserve. As of March, China was estimated to be holding $3 trillion worth of U.S. currency.
Starting in 2014, China saw digital currencies as a way of shifting away from U.S. dollars. It has since made advancing digital currency technology a key national strategic goal.
National economic plans in 2016 mention advancing blockchain, the technology behind popular digital currencies such as Bitcoin.
President Xi Jinping told his Politburo in October 2019 that China must accelerate the development of blockchain.
Digital transactions expand yuan’s reach
Right now, when two companies that use different currencies create a business contract, the value of the transaction is usually denominated in dollars. This requires the companies to “hedge” the risk that the value of their currency will change, thus changing the value of the contract. That frequently means they need a bank to act as an intermediary, but that may not be the case in the near future.
Michael J. Casey, chief content officer at CoinDesk, a news site specializing in digital currencies, said a foreign importer and a Chinese exporter could mutually instruct computers in a blockchain network to place a renminbi-denominated payment into a kind of digital lockbox as a new way of doing business.
“This decentralized escrow system could let foreign businesses strike trade deals without requiring dollars to hedge their exchange rate risk,” Casey said in an interview with VOA.
Jeremy Allaire, CEO of Circle, a peer-to-peer payments technology company, said China’s digital currency could lead to wider global use of the yuan.
“This becomes a mechanism by which [the Chinese yuan] can be used in everyday transactions all around the world,” Allaire said on the U.S. business network CNBC in September 2019, when China announced that it would launch its own digital currency to “protect” its foreign exchange sovereignty.
Experts pointed out that China’s proposed digital currency bypasses the Western banking system, including SWIFT, the Belgium-based Society for Worldwide Interbank Financial Telecommunication, that enables financial institutions worldwide to securely send and receive information about transactions.
China’s central bank has introduced a homegrown digital currency across four cities as part of a pilot program, marking a milestone on the path toward the first electronic payment system by a major central bank.
Six countries have digital currency pilot programs in place. Canada is in development mode while the US lags.
The Central Bank Digital Currency Tracker shows the evolution towards central bank sponsored digital currencies.
Nearly 80% of central banks are engaged in work related to national digital currencies, according to a 2020 Bank of International Settlements survey.
Last month, China announced a pilot project of its digital Yuan in four cities. This month, the US is considering implementing a digital dollar.