China’s digital currency may be the model for the future of money, but it raises concerns about the stability of the world economy.
A China is making promising progress with testing the yuan digital. The country announced the success of a pilot test in the city of Suzhou, near Shanghai, in eastern China, where 181,000 consumers received ¥ 55 (seven euros) of free money in digital wallets to spend at stores participating in the shopping festival. Double Fifth between May 1 and 5.
This was part of a larger test by the People’s Bank of China targeting 500,000 consumers in 11 Chinese regions since April. For those eligible, there is an application that gives them a wallet. Using it for shop at thousands of participating stores, they receive discounts.
The digital yuan is a version of the normal Chinese currency, but in blockchain, which is the technology that sustains digital currencies as bitcoin e ethereum. However, this blockchain is controlled, which means that the bank decides who can use it.
China is also testing the yuan’s digital border between Hong Kong and neighboring Shenzhen, and is developing a platform to make the currency internationally viable involving Thailand, the United Arab Emirates and the Bank for International Settlements.
No date has yet been announced, but a national launch looks predictable in the next 12 months, probably in staggered stages.
In contrast, Western central banks such as the Federal Reserve, the Bank of England and, to a lesser extent, the European Central Bank have moved more slowly in so-called central bank digital currencies (CBDCs). They care about things like getting the right privacy when all transactions will be publicly visible on the blockchain and the effect on commercial banks.
However, a digital yuan raises deep questions about global financial stability. The question for the other major economies in the world is how to respond.
Advantages of digital currencies
The digital yuan it’s cool already. The payments using it are fundamentally different from those on payment platforms like Alipay or WeChat (or even PayPal in the west).
These services can settle transactions very quickly for customers, but behind the scenes there are records of a large number of transactions between the banks of the buyers and sellers, and often also intermediary banks that settle hours or even days later.
The digital yuan circumvents the need for these banks. There is no service fee, unlike these payment alternatives and, in theory, the speed of payments can be even faster.
Unlike cryptocurrencies like bitcoin, the currency is also supported by a government. This means that issuing digital yuan is the same as issuing money in circulation, making it equally secure. Gives the government more control about providing money, as, unlike cash, employees can see all transactions taking place at any time.
Many central banks have sought to develop digital currencies. Some, like Japan e South Korea, are not far behind the Chinese. THE EU it is signaling that a digital euro can take four or five years.
For latecomers, there are several dangers. The first is about international payments. Currently, most transactions between different currencies use the US dollar as an intermediary.
This means considerable demand for the US dollar, which has advantages such as allowing the United States Government to offer cheaper loans. In 2019, for example, only China exported goods worth 110 million euros.
Transactions using the digital yuan don’t need the dollar. About 120 countries have China as their largest trading partner, and many question the agreement in dollars, as this adds to the unnecessary financial risk of adverse exchange rate movements.
China says it is not trying to replace the dollar with the digital yuan and that the “goal is allow the market to choose ” how to do international transactions.
A second danger is that, if central banks do not meet the demand for digital money, market forces will do it. Paper money is rapidly becoming redundant. Credit cards contactless became ubiquitous during the pandemic. Digital money is even better because it costs less to use.
And the third danger is that countries that do not adopt digital currencies may find that their central banks lose control over monetary policy for cryptocurrencies.
In other words, if these non-sovereign currencies become widely used for payment purposes, central banks will find it more difficult to manage their economies by fixing interest rates or changing the money supply. Of course, it is possible to ban cryptocurrencies, but this hinders progress and all the advantages they bring.