People’s Bank of China is grabbing the highlights as the first major economy to launch their Central Bank Digital Currency (CBDC), the Digital Yuan. This comes as no surprise that the US senate is visibly alerted by this movement in China. Speculations are, this might pave way for the realization of China’s longtime ambition – overtaking the US Dollar.
Now is a time when the leading nations have finally found a weapon to raise in their decade-long losing battle against the ever-growing and formidable cryptocurrency. The Economic Superpowers agree upon the concept of central banks of each nation digitizing their currency. These digital tokens come with the backing of the government’s reserve of gold or any standard foreign currency. These tokens are to be created amalgamating the best features of both virtual currency and their traditional counterparts. The term encapsulating this idea is Central Bank Digital Currency (CBDC).
There are several attractive features to this smart money. Not being a legal tender, the cryptocurrency doesn’t lie within the scope of government regulation. It is secure, transparent, and anonymous. The anonymity and security features make crypto a ‘hit’ within the Dark Web.
The anonymity coupled with the privacy policies offered by individual crypto brands further adds to the difficulty in tracing the ends of the transactions. All the better for the dark entities to operate with.
However, its potential is recognized by industry bigs and that leads to investment in billions of dollars, lending this virtual currency a foundation and credence along with a market cap in trillions.
There’s yet another aspect to cryptocurrency: mining. A volume of crypto transactions may be validated using a highly complex network of computers and an equally “outwitting” algorithm to crack the cryptic codes. This process of crypto mining is notorious for its exhaustive power consumption factor. However, the completion of mining a batch of transactions brings rewards in the form of fractional coins.
It is important to note here, China contributes to 71% of the world’s mined Bitcoin, the most expensive cryptocurrency yet.
The Rush for CBDC
As major economies contemplate on the format to compile the good things from private and public money into their CBDC, there are others who have already scored the goals. The central bank of Bahamas was the first to introduce its retail CBDC in 2020, albeit, without much pomp or show. Several nations are currently piloting their CBDC projects.
Live pilot launch of DCash – the Eastern Caribbean Currency Union’s CBDC was announced on March 31.
The Bank of Jamaica has selected the Irish firm eCurrency Mint to provide the technology and support for its prototype central bank digital currency (CBDC). The CBDC pilot is supposed to take place sometime between May and December this year, as per the declarations from the central bank on March 23.
Sveriges Riksbank is set to test the scalability of its product. Whether or not its blockchain-based central bank digital currency network can handle large-scale retail payments, will be determined in the second phase of its pilot.
The Digital Yuan in Circulation
The People’s Bank of China has rolled out the millions worth of digital currency across its major cities in a trial issuance. Broader distribution is imminent during the Winter Olympics to be held in Beijing the next February.
Many key details regarding the digital Yuan are missing. This includes the methods of distribution. The Chinese authorities have claimed that the central bank has devised no novel equipment to unfurl their digital currency. Rather they would utilize the already operational machinery with the commercial banks to carry out its plan.
The recent joint venture between Beijing and SWIFT, the messaging nexus which facilitates most overseas settlements happen today, indicates a possible digital yuan could operate within the current financial architecture rather than outside of it.
China’s Economic Prowess
Despite the Chinese Yuan not making it to the top batch in terms of their currency value, it occupies the second spot to the US in terms of GDP. The recent turn of events has also served to disfavor the Chinese in the consumer market, in spite of that not building up to a blow on the Chinese economic front. Chinese markets have continued to flourish.
The Chinese have also maintained their grasp in economically weaker countries. As analyzed by an Indian Geostrategist, Brahma Chellaney, “Through its $1 trillion “one belt, one road” initiative, China is supporting infrastructure projects in strategically located developing countries, often by extending huge loans to their governments. As a result, countries are becoming ensnared in a debt trap that leaves them vulnerable to China’s influence.
“Of course, extending loans for infrastructure projects is not inherently bad. But the projects that China is supporting are often intended not to support the local economy, but to facilitate Chinese access to natural resources, or to open the market for its low-cost and shoddy export goods. In many cases, China even sends its own construction workers, minimizing the number of local jobs that are created”
The above observation certainly underlines the ferocity of Chinese geopolitical ambitions. Given that, any suspicion raised on the rapid launch of China’s Digital Yuan cannot be dismissed as baseless.
While it surely pays to remain cautious over and scrutinize the movements by countries with a history of unethical policies, the current step towards progress by China is apparently benign as the US still retains mechanisms to harm the Chinese economy.