China has become the frontrunner in developing a Central Bank Digital Currency (CBDC) among the world’s biggest economies. China’s central and provincial government is leading this initiative to promote global currency use. This trend is a significant challenge to the dollar-based financial system and currencies such as the Yuan (RMB) based on the U.S. dollar. Therefore, if you have been considering investing in cryptocurrency, now is the time to do so at Bitcoin Loophole.
The U.S. Congress has been active in its anti-dollar policy era, but so far, its efforts have only contributed to weakening confidence in the dollar, not strengthening it. For example, legislation prohibiting the manipulation of interbank lending rates based on the Federal Reserve’s monetary policy was passed by the government in 2015, aiming to curb speculation in financial markets by making lending rates more stable and predictable. However, market analysts say that the legislation is more likely to cause a misallocation of credit, harming the real economy.
To back up its measures against speculation, China’s central bank has launched a CBDC. This system is a digital currency based on the Yuan (RMB) and will be rooted in an interbank clearing system backed by blockchain technology.
Yuan-based CBDC to ensure currency stability:
China’s central bank said it would launch its first digital currency (CBDC) pilot project in Shanghai in late 2020. The reports said the digital currency would be based on the yuan, and people would ensure interbank clearing through blockchain technology. However, those who believe that central banks are inefficient state institutions and question their ability to issue digital currencies that can meet economic demands can be skeptical about this news.
But it’s still worthwhile to review China’s plans for CBDC because the move is part of a more significant trend in the global push towards digitizing money supply, led by central banks themselves. China has published guidelines for its digital currency multiple times but has yet to reveal specific details about its operations. Digital Yuan is mainly seen as a tool to deter money laundering and the financing of terrorism. It’s also a way to prevent fraud in the financial system and lower the cost of retail financial services.
Under President Xi Jinping’s administration, China has increased its efforts in developing a digital version of its currency. In addition to using its digital currency, China has been promoting the international use of digital currencies worldwide to reduce dependence on the U.S. dollar and strengthen global economic stability.
Impact of dollarization on the global economy:
The structure of the global financial system has undergone profound changes over the last two decades. The role of central banks and their currencies in international finance has been fading away due to private banking, payment systems, and other non-banking financial institutions (NBFIs). Private NBFIs have been playing a pivotal role in shaping global capital flows by intermediating among borrowers and lenders. They also provide payment services to individuals and companies globally, thereby increasing their economic efficiency.
According to the Bank for International Settlements (BIS), non-bank issuance of cross-border payments accounted for more than 60 percent of total international payments in 2017. The rapid rise in cross-border payment has offset dollarization in international trade. Moreover, it shows that the expansion of the international financial structure is closely related to the business activities of non-bank financial institutions.
China’s current account surplus shrank by 10 percent since last year, while cross-border payments have reached over US$1 trillion annually. Considering the rapid expansion of cross-border payment, China’s central bank has decided to issue a digital currency to ensure stability in global financial markets and lower transaction costs for individuals and companies globally. As a result, China is no longer just a creditor country but is fast becoming one of the largest capital exporters worldwide.
How can the digital yuan become a threat to dollarization?
The dollarization of the global financial system will gradually reduce the role of the dollar as a reserve currency and undermine the international status of the U.S. Renowned economists are particularly concerned about China’s plans for digital currency. They believe that China’s push to launch a digital version of its currency will succeed and have far-reaching implications for the global financial system. If other countries follow suit and issue their digital currencies, the international monetary system will drastically change.
In an environment where the global economy is closely integrated, it would be more challenging to control monetary policies in many countries. Therefore, there’s a growing demand for stable currencies such as the yuan among non-Chinese companies who wish to invest in China. The U.S. and European central banks have tried for a long time to preserve their status as the primary reserve currency but have yet to achieve this goal. If China succeeds in issuing its digital yuan and other countries follow suit by doing the same, it will be a big blow to the dollar’s international status.
China’s digital yuan will bring rapid growth:
Using digital yuan will help China maximize its economic efficiency and provide growth opportunities for its financial markets while reducing transaction costs and financial risks for companies worldwide. In addition, the success of China’s yuan is expected to spur other countries around the globe, including Russia, India, Japan, Korea, and Australia, to issue their digital currencies.