Digital Yuan ... a Chinese giant on the way
In a move that the world is watching with interest, China is making great strides in testing its official digital currency, which is also called the "yuan", as it announced the success of an experimental model in the city of Sushu, near Shanghai, after the authorities put the equivalent of 8 US dollars in digital wallets for thousands. Citizens to spend it at a shopping festival held last May.
This experiment was part of a larger test conducted by the People's Bank of China, which has targeted 500,000 consumers in 11 Chinese regions since last April, through an online application that gives those eligible for these funds a digital wallet in which electronic currencies are deposited, as they are used for purchases in thousands of stores. Participate in the experiment.
The digital yuan is a copy of the traditional Chinese currency that is produced through the blockchain technology in which all digital currencies work. In its simple form, it is a financial ledger that cannot be tampered with, through which currencies such as Bitcoin, Ethereum, and others were created. In China, blockchain technology is used under certain conditions, which means that the "People's Bank" is the one that decides who is entitled to use it.
The last round of tests is 10 times the size of the first trial round that already took place in the fall of 2020, in addition to that, China is testing the digital yuan on the border between Hong Kong and the neighboring city of Shenzhen, and is also developing a platform to make the digital currency tradable internationally. The platform is currently Thailand, the UAE and the Bank for International Settlements.
These successive steps increase the likelihood that China will become the first country to fully place its currency on the officially authorized blockchain, and so far no date has been announced for practical implementation, but it seems from successive experiences that this announcement will be within a year, and it is expected that This step is done in staggered stages.
In contrast to the ambitious Chinese steps, Western central banks such as the Federal Reserve, the Bank of England, and to a lesser extent the European Central Bank are all moving at a slower pace with regard to "central bank digital currencies". This is due to many reasons, including privacy issues when all are Transactions are visible to the public via the blockchain, and also on the potential impacts on retail banks or small banks.
However, the digital yuan raises many important questions about global financial stability, in addition to the fundamental question of how to respond to major economies.
The digital yuan already has legal tender status, and the payments it uses are fundamentally different from those on Chinese digital payment platforms such as "AliPay" or "WeChat", or even those in the West such as PayPal, where these services settle transactions. Very quickly for dealers, but behind the scenes there are books of a large number of transactions between banks of buyers and sellers and often intermediary banks that settle their final accounts after hours or even days.
As for the digital yuan, it exceeds the need for these banks, and there are no service fees, unlike all other payment alternatives, and in theory the speed of payments could be higher, and unlike other cryptocurrencies such as Bitcoin, the Chinese currency is supported by the government, which means that issuing The digital yuan is the same as the traditional yuan issuance which makes it completely safe, and it also gives the government better control over the money supply, because unlike traditional banknotes, officials can see all the transactions that happen at any time.
China is not alone in this regard, as many central banks are studying the development of digital currencies, and some, such as Japan and South Korea, while estimates in the European Union say that the digital euro has a period of not less than 4 more years.
As for the other countries that are lagging behind, there are many risks looming on the horizon. The first is related to international payments, as most transactions between different currencies currently use the US dollar as a mediator through the international banking "SWIFT" protocol, and this means a great demand for the US dollar, This brings other benefits such as enabling the US government to borrow at less interest than others, and in 2019 for example, China alone exported goods worth $ 134 billion.
As for the transactions that use the digital yuan, they will not need the "SWIFT" protocol or the dollar, which will clearly affect the use of the US currency in international trade. With more than 120 countries, China is the largest trading partner, and there are many questions about the settlement in dollars because it adds. Unnecessary financial risks, tremendous economic impacts are expected from the Chinese move. Despite this, China says it is not trying to replace the dollar with the digital yuan, and the primary goal is to allow the market to choose the settlement method that suits it.
The second risk is that if central banks do not meet the demand for digital money, then market forces will do so, as the use of paper money has declined in the recent period, especially with the spread of the Corona virus, which led to a widespread spread of contactless credit cards, and in all cases, digital money Better because it is less expensive to use.
As for the third risk, it is related to the fact that countries that fail to adopt digital currencies may lose control of monetary policy in favor of cryptocurrencies by central banks, simply because if non-sovereign cryptocurrencies become widely used for payment purposes, central banks will find it difficult to manage their economies through Determining interest rates or changing the money supply, of course, it will only have to ban cryptocurrencies, but this means giving up all the benefits that they bring.
The digital yuan is turning into a fait accompli amid escalating tensions between China, the United States and Europe, and it is expected that tension will increase with the transformation of China into the world's first engine for this type of currency, and given the size of the risks, it seems necessary for the rest of the world to start testing their digital currencies. Rapidly because blockchain technologies are already reinventing the way payments are made, the risk of being left behind is too great to be ignored.
Source:1
