Can Digital Yuan Challenge US Dollar's Dominance in International Finance?

China's central bank is testing its digital currency in several major Chinese cities. The chairman of US Federal Reserve has recently confirmed that the US Central Bank is working on digital dollar. The State Bank of Pakistan announced in 2019 that it was developing a digital currency. It seems that the popularity of Bitcoin has triggered serious worries of loss of control of the official financial systems among the central bankers around the world. China's substantial lead in digital currency could put it far ahead of the US in the future of global payments and financial settlement. It could eventually displace the US dollar and provide China with the immense global financial power that the US currently enjoys. 

Digital Yuan

Central Bank Digital Currency (CBDC):

What Is a Central Bank Digital Currency (CBDC)?  Investopedia defines it as a digital currency that "uses a blockchain-based token to represent the digital form of a fiat currency of a particular nation (or region)". A CBDC is centralized; it is issued and regulated by the  country's Central Bank. Unlike decentralized cryptocurrencies like Bitcoin, a CBDC would be centralized and regulated by a country's monetary authority.  


Motivations for such currencies are many, but the key one is to maintain control of the national and global finance. Another worry is that the use of unregulated digital currencies like Bitcoin could enable serious domestic and international crimes. It could also make tax evasion easier and hurt governments' ability to support public expenditure on education, healthcare, physical infrastructure, public safety, national defense and other priorities. 
 
Digital Yuan:
 
The People’s Bank of China, the Chinese Central Bank, is testing its e-yuan digital currency in Shanghai, Chengdu and other major cities. It has filed more than 100 patent applications for its digital currency. Reports indicate that the experiments are going smoothly, and soon people will have the option of downloading a government-issued digital wallet. Unlike commercial payment processors such as WeChat Pay and Alipay, the official Chinese version will be equivalent to an account at the central bank with the same guarantee as hard cash, according to The Economist magazine.  China is far ahead of of the rest of the world, including the United States in the development of a central bank-backed digital currency (CBDC). This could put it far ahead in the future of global payments and financial settlement. It could eventually displace the dollar and provide China with the immense global financial power that the US currently enjoys. 
China has set up a partnership with SWIFT, the Society for Worldwide Interbank Financial System, that manages the global system for cross-border payments, through its digital currency research institute and clearing center.    SWIFT is a major vehicle for the United States to enforce its unilateral sanctions on countries like Iran, North Korea and Venezuela. 
Digital Dollar: 
US Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell have confirmed last week that they are working on digital dollar as a high-priority project. 
US Treasury Secretary Janel Yellen has been quoted by the media as saying: “I gather that people at the Federal Reserve Bank of Boston are working with researchers at MIT to study the properties of it. We do have a problem with financial inclusion. Too many Americans really don’t have access to easy payment systems and bank accounts. This is something that a digital dollar, a central bank digital currency, could help with. I think it could result in faster, safer and cheaper payments.”  
Digital Rupee: 
A top official of the State Bank of Pakistan, the nation's central bank, announced in April 2019 that the institution aims to issue a digital currency (Central Bank Digital Currency or CBDC) by 2025, according to media reports.   Speaking at the launch of regulations of Electronic Money Institutions (EMIs), central bank officials said that EMIs will be non-bank entities to be licensed by the central bank to issue e-money for the purpose of digital payments. Pakistan's finance minister Asad Umar and the central bankers said they are targeting Pakistan's economy to go fully digital by 2030.
More recently, the State Bank of Pakistan launched Raast, a digital payment system.  It is essentially a pipe that is intended to connect government and financial institutions with consumers and merchants with each other to process payments instantly at very low cost. Raast will be boosted by Pakistan government's decision to use it to pay salaries, pensions and pay welfare recipients under Benazir Income Support and Ehsaas Emergency Cash programs. 
Raast digital payment infrastructure represents a great leap forward for the use of financial technology (FinTech) and financial inclusion in the  country.  It will also promote e-commerce in Pakistan. Undocumented economy poses a serious threat to the country because it creates opportunities for criminal activities and tax evasion.  Raast is part of the government's effort to modernize payment systems and document the nation's cash-based informal economy. 
America's Global Financial Power: 
There's a common perception that the United State is abusing its extraordinary financial power to arbitrarily punish countries through its unilateral financial sanctions. This power stems mainly from the fact that the US dollar is the main international reserve and trade currency. It allows US to control multi-lateral financial institutions like SWIFT, World Bank, IMF and FATF. Many countries, including major US allies in Europe, are now looking to find alternatives to SWIFT. This has been specially true since former US President Donald Trump existed the JCPOA (Joint Comprehensive Plan of Action) agreed among the 5 permanent members of the UN Security Council (P5) plus Germany. Here's an excerpt of a recent New York op ed by Peter Beinart: 
"By deluding themselves about the extent of America’s might, they are depleting it. A key source of America’s power is the dollar, which serves as the reserve currency for much of the globe. It’s because so many foreign banks and businesses conduct their international transactions in dollars that America’s secondary sanctions scare them so much. But the more Washington wields the dollar to bully non-Americans into participating in our sieges, the greater their incentive to find an alternative to the dollar. The search for a substitute is already accelerating. And the fewer dollars non-Americans want, the harder Americans will find it to keep living beyond their means."
 
Summary:
Central Bank Digital Currencies (CDBDs) are gaining momentum with the talk of digital yuan and digital dollar. Motivations for such currencies are many, but the key one is to maintain control of the national and global trade and financial systems. If successful, these new currencies and associated payment systems could challenge the global financial power of the United States and fundamentally transform banking as we know it. 

Views: 28

Comment by Riaz Haq on March 2, 2021 at 10:30am

#China Charges Ahead With a National #Digital Currency. Some economists said China’s digital currency would also make it easier for the renminbi to compete with the #US dollar as a global #currency because it can move internationally with fewer barriers. https://www.nytimes.com/2021/03/01/technology/china-national-digita...


The electronic Chinese yuan is now being tested in cities such as Shenzhen, Shanghai and Beijing. No other major power is as far along with a homegrown digital currency.

Annabelle Huang recently won a government lottery to try China’s latest economics experiment: a national digital currency.

After joining the lottery through the social media app WeChat, Ms. Huang, 28, a business strategist in Shenzhen, received a digital envelope with 200 electronic Chinese yuan, or eCNY, worth around $30. To spend it, she went to a convenience store near her office and picked out some nuts and yogurt. Then she pulled up a QR code for the digital currency from inside her bank app, which the store scanned for payment.

“The journey of how you pay, it’s very similar” to that of other Chinese payments apps, Ms. Huang said of the eCNY experience, though she added that it wasn’t quite as smooth.

China has charged ahead with a bold effort to remake the way that government-backed money works, rolling out its own digital currency with different qualities than cash or digital deposits. The country’s central bank, which began testing eCNY last year in four cities, recently expanded those trials to bigger cities such as Beijing and Shanghai, according to government presentations.

The effort is one of several by central banks around the world to try new forms of digital money that can move faster and give even the most disadvantaged people access to online financial tools. Many countries have taken action as cryptocurrencies such as Bitcoin, which has recently soared in value, have become more popular.

But while Bitcoin was designed to be decentralized so that no company or government could control it, digital currencies created by central banks give governments more of a financial grip. These currencies can enable direct handouts of money that expire if not used by a particular date and can make it easier for governments to track financial transactions to stamp out tax evasion and crack down on dissidents.

Over the last 12 months, more than 60 countries have experimented with national digital currencies, up from just over 40 a year earlier, according to the Bank for International Settlements. The countries include Sweden, which is conducting real-world trials of a digital krona, and the Bahamas, which has made a digital currency, the Sand Dollar, available to all citizens.

In contrast, the United States has moved slowly and done just basic research. At a New York Times event last week, Treasury Secretary Janet L. Yellen indicated that might change when she said an American digital currency was “absolutely worth looking at” because it “could result in faster, safer and cheaper payments.”

Comment by Riaz Haq on March 3, 2021 at 12:47pm

#China, #Pakistan reiterate commitment to #infrastructure development plan on the 70th anniversary of diplomatic ties & strong mutual friendship. So far, 46 of 70 planned #CPEC projects have been completed, with a combined investment of US$25.4 billion. https://www.scmp.com/news/china/diplomacy/article/3123925/china-pak...

China and Pakistan should continue to support their multibillion-dollar infrastructure development programme, Chinese Foreign Minister Wang Yi said on Tuesday, despite the scheme becoming a focus for regional tensions and concerns about its financial viability.
“We must persist in creating a mutually beneficial and win-win situation,” the foreign ministry quoted Wang as saying during a video chat with his Pakistani counterpart, Makhdoom Shah Mahmood Qureshi. The call was made to mark the 70th anniversary of the countries establishing diplomatic relations.
“The two sides should firmly promote the construction of the China-Pakistan Economic Corridor [CPEC], creating new growth points in areas including industry, agriculture, science and technology, people’s livelihoods and third-party cooperation, further enhancing Pakistan’s sustainable development capability,” Wang said.

Launched in 2013, the CPEC is an offshoot of the Belt and Road Initiative – Chinese President Xi Jinping’s pet project to boost trade and infrastructure links across Asia and beyond – and comprises a network of roads, railways, ports, power plants, oil and gas pipelines and optical fibre cables.

Though often valued at US$62 billion, only about US$25 billion worth of CPEC projects have so far been developed.
Wang said that 46 of 70 planned CPEC projects had been completed, with a combined investment of US$25.4 billion. The scheme had achieved “satisfactory results” and created job opportunities in Pakistan, he said

Qureshi said Pakistan fully supported China’s belt and road plan and described the CPEC as a prime example of its “high-quality development”, according to a report by Chinese Communist Party mouthpiece People’s Daily.


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The CPEC has strategic significance for China as it provides an alternative route for importing oil and gas from the Middle East. But Delhi is worried that Gwadar Port – a CPEC project on Pakistan’s Arabian Sea coast – will be used as a base for the Chinese navy.
Wang said China and Pakistan should expand their strategic partnership and uphold multilateralism.
“We should firmly hold that all countries have equal status regardless of their size while opposing hegemonism and power politics,” he said.
“We should deepen political mutual trust. Both sides should continue to firmly support each other on issues involving each other‘s core interests and major concerns.”

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