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China’s planned cryptocurrency – too much power for central bank?

China cryptocurrency

E-commerce and electronic payments are already the most common method of payment in increasingly cashless China. Last year, four out of every five payments was made through mobile transactions. Now, plans are underway to launch a new digital currency, the digital yuan, controlled by China’s central bank that could revolutionize how the communist government runs the economy.

The concept is rather simple. Much like how many Chinese pay virtually through Alibaba Group Holding’s Alipay, one of the country’s most popular fintech platforms, the digital yuan would be linked to a smartphone and transactions placed through an app, using barcodes or QR codes. However, the digital currency would be held by the People’s Bank of China, the central bank, and not a private bank. Moreover, reports suggest that users will be able to transfer money between separate accounts by tapping two smartphones together, and transactions would be possible without an internet connection.

Testing began in 2014, and the central bank’s Digital Currency Research Institute, in charge of the plan, was launched in 2017. Its demand has been spurred on in recent months by worries about the hygiene issues of cash during this COVID-19 pandemic. The new cryptocurrency could be unveiled in 2022, ahead of the Winter Olympics that will be held that year in Beijing and Hubei province.

China cryptocurrency: Easy as a touch

For users, a new digital currency would offer ease and flexibility. For the government, it will provide added security by allowing the authorities to more easily monitor illegal purchases, money laundering and tax avoidance. Theoretically, it would also allow Beijing’s state-planners to better react to situations, monitoring money supply in live time so as to change macro-policy to manage credit bubbles and inflation.

However, there is no shortage of concerns. For starters, there are worries that with the digital yuan as the legal tender, it could be ruinous to private-sector competitors, like Alipay and WeChat Pay. Moreover, there’s also the question of macro-economic security if a digital currency sits on the central bank’s balance sheet, rather than in bank deposits. Then there’s dangers involving cybersecurity.

China’s central bank – too much power over planned crypto currency?

For those who worry that the ruling Chinese Communist Party (CCP) already has too much arbitrary control over the daily lives of its citizens, especially their digital activity, a digital currency would appear even more dystopian. Once the digital currency is launched, party officials could monitor every transaction in real time. Indeed, unlike almost every other cryptocurrency, which are intended to deregulate monetary power away from centralized government and central banks, the planned digital yuan will be controlled by China’s central bank.

Similar concerns were expressed over Facebook’s planned digital currency, the Libra. Revisions made in April suggest that Libra will now be made up of multiple units tied to existing national currencies, like the US dollar or euro, which will allow central banks to maintain some authority. Previously, though, the idea was that Libra would be a digital currency independent of existing fiat money, but this raised concerns that, given Facebook’s considerable size and the scope of its database portfolio, it could have become something akin to a private central bank without national or democratic regulation.

USA-China: A new cold war

Before changes to the Libra, Beijing saw Facebook’s digital currency as “no different from a digital dollar disguised as a currency basket,” as Nikkei Asian Review put it. As such, there is also a geopolitical aspect to the digital yuan, too. As debate increases over whether the US and China have entered a “new cold war” scenario, many experts agree that superpower rivalry will be mainly played out in the technological field. That is already seen by Washington’s efforts to lobby democratic allies to not allow Huawei, the Chinese tech giant, to build their 5G network, over claims that Huawei spies on behalf of the Beijing government.

As the US and China begin a tech-race to see whose companies can develop the latest and most advanced technology for the rest of the world, fintech and digital currencies are certain to play a major part, with Beijing claiming that the digital yuan could one day become a global currency. That, too, waits to be seen and there are many skeptics who believe a digital yuan will have to remain local to China.

Yet, there is also talk of a new East Asian digital currency network between the Chinese yuan, Japanese yen, South Korean won and Hong Kong dollar that would allow smoother transactions in cross-currency trade between the countries – and would most likely be a facet of a free-trade zone being negotiated between Japan, China and South Korea.