The People’s Bank of China is expected to launch a digital version of the yuan late this year, and the project is being accelerated, in response to the emergence of Facebook’s digital currency, Libra, and the outbreak of the Coronavirus.
In an article published by the US Foreign Policy Research Institute website, the writer Robert Murray said that the People’s Bank of China conducted experimental tests in at least 4 cities, with the participation of American companies, and despite the conduct of various countries on the establishment of digital currencies for central banks, China was able to Significant progress in this area, as it appears that it will be the first economy to issue such a currency.
The digital yuan will be programmable and traceable, which means that the Chinese government will be able to monitor capital flows significantly and impose restrictions or preconditions on the uses of the currency, in return, the digital yuan poses a threat to the diplomatic, media and economic interests of the United States and its allies.
The digital yuan will help China internationalize its currency, and promote the yuan as a competitor or alternative to the US dollar, not to mention that it will enable it to expand its monitoring capabilities, as the new currency will provide it with a window on the economic activity of users inside or outside its borders, which will empower it to control it.
The yuan will also allow China to circumvent sanctions, arms embargoes and money laundering regulations by providing an alternative to the dollar-based international payment system, which is monitored by Western financial institutions.
Causes and challenges
The stated reasons for China’s issuance of this currency include reducing costs associated with managing paper money and improving the effectiveness of monetary policy, not to mention accelerating and reducing the cost of international payments and combating money laundering, terrorist financing and other criminal activities.
The People’s Bank of China is also concerned about China’s overwhelming dependence on electronic payments, and in the event that its networks are interrupted or exposed to danger, there will not be enough paper currency in circulation to promote commercial exchanges, causing the collapse of its financial system.
Although Beijing is keen to control and monitor capital flows, electronic payment platforms such as Tenpay and Alipay do not provide it with the degree of direct control and monitoring that the digital yuan will enable.
The writer pointed out that Chinese officials accelerated the implementation of the digital yuan project when Facebook announced in June 2019 its intention to launch its digital currency, “Libra.”
The People’s Bank of China believes that Facebook’s currency poses a threat to the yuan and to domestic payment systems in China, and since Facebook will not include the yuan among its reserve currencies, it is likely that the widespread use of Libra will lead to an outflow of capital, which in turn will contribute to weakening the yuan.
The Corona pandemic has led China to make unremitting efforts to make the digital yuan initiative a reality as soon as possible, and in light of the increasing concerns that paper cash supplies are carrying the virus, the People’s Bank of China sterilized and stored cash for up to 14 days.
The digital yuan would enable China to monitor spending within the framework of its $ 3.6 trillion stimulus package, and in light of the growing adoption of digital currencies in commercial transactions in China, it will control these transactions, however it will enable the centrally controlled digital yuan China has achieved another level of oversight.
Although no official date has been set for its launch, the Chinese investment bank, Citic Securities, has expected to officially launch the digital yuan by the end of 2020, and China has completed the design of the digital yuan, and began conducting experimental tests in 2019 to study its stability and security.
Characteristics of the digital yuan
Given that the digital yuan is considered a currency based on distinct tokens and blockchain technology, it will provide the modernization and benefits that companies and individuals seek around the world, and users of this currency will be able to conduct their transactions without the need for a bank or other intermediary, and in turn it will be protected by encryption. The robust and easy to track digital ledger that cannot be erased.
In theory, this currency will be safer and faster than the current SWIFT system, under which transactions can take days to complete, and has been the target of millions of dollars in thefts during the recent period.
The digital yuan will be distributed in a way that largely preserves the institutional channels of cash distribution, in addition to a select group of commercial banks, and the People’s Bank of China will issue the currency and redeem it through UnionPay and payment platforms.
These banks and financial institutions will be distributed to companies and individuals through digital wallets approved by the People’s Bank of China, and users will be able to either make payments or transfer money online.
Internationalization of currency
Observers believe that the digital yuan is an attempt to significantly enhance the international standing of the yuan, making it a currency that is used in daily transactions around the world, and at the local level, the use of this currency can be mandatory to obtain public services, such as health care, public transportation and utility services, China has also indicated that it wants to use the digital currency during the 2022 Olympic Games in Beijing.
Since there is no need for a necessary bank account abroad, the digital yuan can attract about two billion people without bank accounts in the world.
It is reported that the high speed and protection provided by digital yuan transactions could attract many international companies involved in trade with China, with close trading partners in Asia and beyond.
But so far, efforts to internationalize the yuan have been hampered in part by China’s foreign exchange controls and a dearth of trust in the Chinese government as a custodian of wealth.
Indeed, making the digital yuan an international currency would reduce China’s need to impose foreign exchange controls by reducing the risks associated with the yuan’s exchange rate and enabling China to expand its supervisory capabilities abroad.
Monitoring and control
The People’s Bank of China promised that the digital yuan would have a “controlled anonymity” feature, meaning that the transactions would not reveal the identity of the user, however, the PBOC would retain the ability to monitor and track the user’s entire network.
In fact, the fully fledged digital yuan system, potentially activated through blockchain and other technologies, will create a perpetual government-owned account registry in which every transaction is recorded and monitored through users’ digital wallets.
This monitoring is only part of the threat posed by the digital yuan, as the currency will give China a powerful new tool to control users, and the People’s Bank of China has publicly stated that it will have and the financial institutions that distribute the currency the ability to freeze any digital yuan or accounts involved in transactions. Immediately suspicious, and the bank can use its capacity, as the central authority and exclusive owner of the system, to encrypt how the money is spent.
However, there are positive uses for this ability. For example, if China allocates money to lend to small businesses, it can encode the digital yuan to activate it when depositing into the account of a similar institution.
The author concluded that the central question regarding the ultimate success of the digital yuan is whether people and companies are willing to trust the Chinese government as responsible for their wealth and privacy.