For several years now, China has been developing the digital yuan, the first cryptocurrency from a central bank and government in the world. And it’s nearing completion.
Chinese online retailer JD recently began accepting it as a payment method as the government trials its use by giving citizens up to $3 million worth. It is also going to be used to facilitate cross-border transactions with Hong Kong. It’s set to be fully rolled out before the 2022 Winter Olympics in Beijing, which will act as a showcase.
Many are speculating that this new currency will have global ramifications, with Facebook’s Libra executive David Marcus noting that China will create a digital currency system that can be entirely out of reach for US authorities, meaning America’s financial sanctions would have little effect. He added that if the digital yuan gets widely adopted across the world, many countries could opt for renminbi as an alternative to the dollar for international clearing and settlement services.
So, what is a ‘digital currency’ all about and how does it work? The digital yuan will be the first national currency which will not exist in physical form, but entirely online. While currencies of old were traditionally based on something tangible – such as the gold standard – the digital yuan is built on computer engineering. This means the way it is utilized and regulated differs from a normal currency. A digital currency is more easily managed by its parent government, and more traceable and observable.
With a government-controlled digital currency, financial crimes such as money laundering and tax evasion become more difficult. It provides increased security for users, even if it reduces privacy. But even more striking to international observers than the implications for personal use is the potential geopolitical impact it could have.
The emergence of a digital yuan, as opposed to the standard yuan, is an international gamechanger. As the first currency of its kind, China has the potential to pioneer it as a new global standard in its own transactions and, by using the country’s economic muscle, persuade other countries and financial institutions to use it, too. The potential outcome is clear; it may have a serious impact on the US dollar.
At present, the dollar is the hegemonic currency of the world. It is the preferred medium of transaction for many sectors and commodities alike, not least in the realm of finance. Due to its widespread use and the dominance of American financial institutions, the US government has the power to weaponize the dollar as a form of ‘extraterritorial jurisdiction’ against countries that it doesn’t like.
If the US sanctions a company or individual, it effectively cuts them off from the global financial system. The banks who serve these individuals rely on the dollar, and thus face penalties if they violate the sanctions.
This is irrespective of politics. Take, for example, Hong Kong’s executive leader, Carrie Lam, who was sanctioned by the US earlier this year for purportedly “undermining” the city’s autonomy. Now, she is not able to possess a bank account because even China-aligned banks are reliant on US financial markets, and will not touch her.
This demonstrates the global strength of the dollar, but also shows how the digital yuan may change the current landscape. The creation of a new international medium of transaction means that financial institutions, companies and governments now have a new avenue to do business without having to use dollar transactions. This will reduce its global reach. For countries like Iran and Venezuela, heavily targeted by US sanctions, it is an obvious way out.
Of course, such a system will be met with a mixed response throughout the world. While beneficial to some countries, it is inevitable that others will not accept their financial systems being re-written and dominated by China.
The digital yuan is set to face political resistance from the US, which is likely to respond by eventually creating a digital currency of its own (even though it’s well behind at present). The European Union is also likely to move towards a ‘digital euro’ to safeguard its own interests.
On the other hand, the digital yuan should be expected to gain traction in countries strongly integrated with China, particularly in Asia, Africa and Latin America. There are many nations who will see the opportunity to diversify from the US dollar as a positive development.
And so arguably, the rise of the digital yuan will prove to be an innovation which will truly hasten a multipolar world. It has the potential to effectively break the monopoly of the dollar as a unilateral, extraterritorial weapon and rewrite the rules of the global financial system in a way which will be shaped by China. It could set off a digital currency race with many other major powers too, fragmenting the existing order whereby the US dollar serves as the underbelly of all things.
The cashless, digital revolution is on its way, and while the West has so far failed to come up with any comparable scheme of its own, China’s is almost at the finish line already.
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