China Leads in Race for Digital Currency

Taking on the U.S. Dollar’s Dominance
The well-established Chinese habit of paying with a mobile phone should make the transition to a digital yuan an easy sell for consumers there while offering big benefits to the Communist regime. 

Issuing a digital sovereign currency could be one way for the government to regain control of domestic financial transactions, says Konrad Adenauer Stiftung Senior Project Manager Alexander Badenheim, speaking with DW from Beijing about a foundation report on digital currency developments in China. 

Doing so might also give China an edge over other countries in this domain, potentially becoming a technological pathbreaker in the transition to a digital currency as more and more adopt similar technology. 

China may “hope to create its own international payment architecture, something comparable to SWIFT,” Badenheim said, referring to the code that helps financial institutions process transactions, “but which would be more centered on digital currencies and dominated not by the US dollar, but by the Chinese digital yuan.”

“I think that’s especially important in current times where we talk about the decoupling between the US and China,” he added.

Currently over 60% of known central bank foreign exchange reserves are in US dollars, according to the International Monetary Fund, making it the de facto global currency. Rather than attempt to settle transactions in different currencies, countries and companies use the dollar to streamline international payments. For comparison, the No. 2 global currency is the euro, which accounts for 20% of international reserves.

A widespread uptake of a digital yuan could lead to central banks similarly holding reserves of DCEP. As the sole issuer of DCEP, this would give the Chinese central bank greater influence over global financial markets. 

By becoming the first world power to dominate the digital sphere, China could potentially carve out a stronger position for itself in the global economy and make it less vulnerable to sanctions from Washington, another step in Beijing challenging the US for global dominance. 

Security Concerns
That’s part of the idea. However, whether other countries will be so eager to use a Chinese-issued digital currency is another story. 

The potential to track payments could deter other countries and international players from jumping on board, Badenheim says.

The Chinese state could theoretically abuse its digital yuan to track transactions of its own citizens, but also any companies or countries that would use the digital yuan.

“Let’s say China buys products from a country and they are paid in the Chinese digital yuan,” Badenheim said. “And this country then goes to another country and buys something over there with the Chinese yuan. It basically could be possible for the Chinese central bank to really have an overview of where those countries spend their money and what they purchase. That’s just a possible scenario, but it’s not unlikely.” 

“The question is whether other actors are willing to accept the risk that China could potentially track their financial transactions,” he said. “I wouldn’t say it’s a given fact that China will do it, but it’s a possibility of course.”

Digital Space Race
For this reason, China’s frontrunner status might not be enough to guarantee its success in the race to becoming a global digital currency leader. 

The European Central Bank on October 2 said it planned to prepare for the launch of a digital euro in the European Union, where data protection has long been top of mind in policy making. 

And of course there is Libra from Facebook. With Libra, the social media platform has sought to offer a privately run, global currency to its over 2.7 billion users, much to the dismay of financial regulators around the globe.

Who the victor will be in the race to the digital currency frontier remains to be seen. And for the time being, even in China, physical cash will remain in circulation.

But what is clear is that how we pay in the future, and in what digital currency, is liable to have a big impact on everything from the international economic pecking order down to who knows how much you really spend on takeout.

Kristie Pladson is news reporter at DW.This article is published courtesy of Deutsche Welle (DW).