A lengthy article in The Wall Street Journal, China creates its own digital currency, a first for major economy, outlines the likely impact of Beijing’s initiative and the strategic possibilities it offers in terms of avoiding US blockades of its companies, how this will boost its role in international transactions, while allowing it to monitor its economy in real time.
Stablecoins, or digital currencies linked to a specific asset or basket of assets, are seen by many as the step prior to introducing cryptocurrencies: centralized and controlled by a regulator, whether a central bank or some other type of official entity, they offer a greater understanding of the evolution of users, who continue to see behind them the same type of backing that paper currencies had. However, that backing, in reality, is more fragile and arbitrary, especially in post-pandemic times, than that of a cryptocurrency that only issues a fixed amount of units based on its regulatory algorithm. This requires a leap of faith that many find difficult to consider: to go from relying on mathematics to relying on a centralized authority with the ability to manipulate the value of a currency is, as such, a value proposition that many people still do not accept.
What is the significance of China being the world’s first major economy to launch a digital currency? First, it largely eliminates the ability of the United States to impose sanctions and blockades based on the SWIFT transfer system, which it controls, as well as obtaining information about those transactions. Beijing sees the move as a way to increase its monetary sovereignty, protecting it from Washington’s decisions.
But the idea, in reality, goes further: creating a digital currency outside the system, which only requires the participation of the central bank that issues it (and in fact, not even having a bank account), and which allows transactions to be made efficiently and without intermediation with Chinese companies that are increasingly present in the world economy, could erode the enormous percentage of international transactions, 88%, which today are carried out in dollars. The development of the major logistics and trade routes that China plans to open in the future could make this even more logical and help cement the expansion of China’s economic dominance in the world.
On the other hand, the system offers the Chinese government total control over transactions in a system of controlled anonymity that allows them to know what amounts are being moved and where, enabling investigations when fraudulent patterns are detected. Making a currency programmable also offers other degrees of freedom, such as the possibility, already experimented with, of introducing an expiration date for some amounts when seeking to boost the economy. For the moment, China has no plans to issue more money than is already in circulation: each digital yuan issued cancels its paper equivalent. But the fact that this element of its monetary policy works this way at the moment does not mean that it cannot changed in the future.
In a market as evolved and accustomed to the use of electronic payment as China, introducing an official digital currency also makes it possible to reduce the level of vulnerability and the risk of depending on private companies for the circulation of money on a day-to-day basis. Moreover, launching a digital currency is not without its complexities, and simply having made the effort to distribute it, experiment with its use and possible problems, as well as its possibilities, is likely to give China an important advantage over other countries: more degrees of freedom on the international scene.
What is most apparent from the tone of Wall Street Journal article is that, for China, its digital currency is a source of significant advantages, advantages that no other strong economy is willing to miss out on. Therefore, the short and medium-term future is more than clear: we can prepare for a scenario with digital dollars and euros sooner rather than later. More than 60 countries have initiated moves to study the issuance of such currencies, which implies that, for a while, they will coexist not only with their physical equivalents on paper, but also with the growing use of cryptocurrencies as they progressively stabilize their value.
We now face a situation many thought impossible: the disruption of money. The repercussions will be huge.
