When Mark Zuckerberg stood in front of a predatory US Congress to defend Libra, he warned that China was not idly waiting around when it comes to developing its own revolutionary tech.
His words seemed to trigger a switch. Almost immediately afterwards, President Xi Jinping came out in support of blockchain technology. He also said that plans for China’s CBDC (central bank digital currency) would be accelerated.
But it wasn’t a rapid or spontaneous response to Libra. China has been researching the possibility of a digital RMB since 2014.
Gavin Brown, Senior Lecturer and Associate Professor of Economics, Policy, and International Business at Manchester Metropolitan University told Coin Rivet: “I was surprised and enthused that they had actually been researching it for the last five years. It wasn’t a knee-jerk reaction. It’s something they’ve been monitoring closely for some time and they deem it to have credibility. So that for me straight away was interesting.”
But what could China’s CBDC be used for and what are the motives behind it?
China’s CBDC could facilitate global trade
Slow and cumbersome bank transfers, red tape, exchange rates, and existing payment rails currently slow down global trade. Then there’s also the fact that the US dollar is currently the lead currency. Almost 50% of all international trade is conducted in dollars.
For countries hampered by US sanctions such as Venezuela, this pretty much cuts them off from the global economy.
Christian Oertel, Global Marketing Manager at Chinese blockchain protocol Conflux Chain, told Coin Rivet: “On a bigger picture, it [China’s CBDC] seems like another step towards dethroning Wall Street as the financial centre and the USD as the leading currency.”
Brown agreed, adding: “There is also the problem of dollarisation of oil. Oil is quoted in USD, so China’s CBDC could be used as another front of attack in the international and global currency wars.”
The South China Morning Post recently reported that Venezuela was considering paying Chinese oil suppliers and contractors in yuan accounts in China, as Caracas looks for ways to survive without access to the US financial system.
Paying suppliers in yuan would allow Venezuela to use funds that it currently has available in China – without touching the US financial system.
However, there’s still the complex and lengthy process of opening Chinese bank accounts and transferring the money. Imagine how many roadblocks a digital yuan could overcome.
Speeding up international transfers
Bobby Lee, co-founder of the first Chinese exchange BTCC and founder of the Ballet hardware cryptocurrency wallet, told Coin Rivet: “China will control the ledger and it will be a digital RMB. It will make the movement of the RMB much easier.
“Today, the only way for me to give you money is to give you paper cash. If I want to do a bank transfer, I have to rely on third-party entities, business hours, time zones, and so on. Then there’s the question of whether you have a bank account in China… all these complex issues. If there is a digital RMB, I can send you digital RMB and I can send it to you right away.”
Oertel added: “It will surely speed up international transfers and bring the RMB to a pole position as leading currency within the Belt and Road Initiative.
“By being a pioneer in digitalising the national currency, China’s best practice can be adapted to other national currencies, which would not only support the adapting governments’ transition into becoming cashless, but also simplify their process of international transfers with the RMB as a leading currency.”
A CBDC could be used to control its population
Brown believes that there are several ways that China’s CBDC could be used. Facilitating international trade and transactions is just one.
“The second part of the agenda is using it as an instrument of control internally for their own population.”
After all, permissionless currencies and corporate currencies present quite a threat to a country like China.
“China has a billion and a half people and is at risk of being invaded by Bitcoin. That could wreak havoc in a country of such a scale,” Brown remarked.
“The ability to have similar technology in terms of speed and transparency but to do so in a state-controlled manner is an extremely powerful tool.”
As Oertel points out: “China is already gaining the reputation of being a cashless society. However, becoming cashless also means relying on third-party systems (like Alipay) when it comes to payments or transfers.
“A clear audit of the money trail is not necessarily provided or absolutely trustworthy. In contrast, when the digital currency is based on blockchain technology, tracing the flow of money can be done without relying on audits of third-party systems.”
We often hear about the anonymous nature of cryptocurrencies. However, in many cases, their transparent ledgers make them exactly the opposite.
“I know everyone talks about the anonymity of cryptocurrency,” says Brown, “but, it’s an auditor’s dream. You have an audit trail for every transaction that’s ever happened in the history of the coin if it’s done properly.
“Obviously, Bitcoin is pseudo-anonymous and currencies like Monero are completely cryptographically dark, but a central bank digital currency has complete transparency on everything.”
An alternative global monetary system
Like Lee, Brown also points to the fact that the ease of use of a digital currency could greatly facilitate payments globally.
“If you can come along to people with a mobile phone and internet connection and ask them if they want to use a digital currency backed by the second-largest economy in the world, many people would be interested in that.”
This would clearly have repercussions, such as undermining the currency of the nation states whose populations decide to move towards that. However, the future of currency is clearly digital – whether it’s led by governments or corporations.
It’s not only China who’s moving forward with plans of issuing a CBDC. The Bank of International Settlements carried out a survey of 80 central banks across the world regarding their opinions on digital currency. It found that almost three-quarters of them were either actively researching CBDCs or undergoing feasibility tests.
The Bank of England has also released papers on how a “crypto pound” would work in the UK economy.
Brown adds: “If you’re the central bank of a meaningful economy or nation state, and a digital currency comes along as a direct threat, it’s in your interests to at least put together a research team to see how you might react to it.”
What will the US’s response be to China’s CBDC?
While China appears to be steaming ahead, the US may be dithering. However, it may be that the response doesn’t come in the form of a “Fedcoin” or a US central bank digital dollar.
“I don’t see the Fed agreeing to tokenise the dollar and going toe to toe with the Chinese,” Brown remarks.
“We may see a tech company like Facebook flying the American flag instead of the government or a central bank.”
Corporations like Facebook certainly have the reach. Half the world’s population is on Facebook, WhatsApp, or Instagram.
“It seems clear that the response may not come from the Fed in the US,” says Brown.
“It may come from a corporate. So we may have a technological giant like Facebook going up against a governmental giant in the form of the People’s Republic of China, or the People’s Bank of China.”
He continues: “My expectation for the future is not in the likes of Bitcoin, or permissionless currencies. All of our direct spending happens with multinationals. I think this is going to be a competition between corporate and nation states as more and more corporations launch their own currencies.
“I see this as the next phase of globalisation. Corporates are so big now. If Facebook were a country it would be 60th in the world in terms of GDP. This is going to be a regulated contest between nation states trying to retain monetary policy control and corporates trying to get in on the act.”
It all sounds a little like the war of the worlds. Will the future of money actually be in the best interests of the end-users or are we willingly handing over more control to governments and corporations? Only time will tell.