China launches into central bank digital currency; America moves slowly

The city of Beijing is launching a trial of the PBoC digital currency during Lunar New Year 2021, as shown in a screenshot of a registration page on JD’s shopping app.

Evelyn Cheng | CNBC

China’s leadership in the digital currency space is focusing attention on US initiatives, but similar efforts are unlikely to be made in the US anytime soon.

With its entry into the still sparsely populated world of the central bank’s digital currency, China takes a society that already relies heavily on electronic payments and integrates it. This also gives the government a crystal ball on the spending habits of its citizens and gives the nation’s currency an edge on the global stage.

At an even higher level, the move raises concerns that the yuan is now an even bigger challenge to the US dollar, which enjoys status as the world’s reserve currency in which much of international trade is denominated.

However, Federal Reserve officials have been delicately getting into the digital currency realm, and that is not expected to change even with the additional heat coming from China.

Fed Chairman Jerome Powell recently said that the central bank will do nothing about it without congressional approval. A joint project between the Boston Fed and MIT remains in its early stages.

“I don’t really think that much will change, to be honest. They are two very different systems that are being dealt with between the United States and China,” said David Grider, head of digital assets research at Fundstrat. “I don’t think this necessarily changes the dynamics of the dollar’s role in the world, which is probably one of the reasons [Powell is] not in such a hurry. “

Still, the US risks falling behind the world globally if it ignores the disruptive nature of digital currencies.

Less than a decade ago, it seemed unlikely that Bitcoin and its peers were anything more than a curiosity. Now, the various cyber currencies are approaching a collective market capitalization of $ 2 trillion, according to CoinMarketCap, which tracks the value of the sector.

The benefits of adoption

Digital currencies have multiple benefits.

They provide access to the financial system to people who cannot pay bills or who do not have access to banks.

At a time when digital transactions are already expected to total $ 9 trillion globally in just a few years, the development would allow governments to catch up with what is already happening around the world with payment systems like WiPay, AliPay and SwiftPay.

But there are also privacy concerns. Central bank digital currencies do not work like bitcoin and other cryptocurrencies, as the transactions would not be anonymous. Fed officials have raised concerns about privacy and implementation issues.

However, that hasn’t stopped the global interest in digital currencies.

If nothing else, China’s leadership in the central bank’s digital currency space is something that breathes down the neck of the dollar when it comes to cross-border payments.

That influence is more likely to be felt in the immediate Asian sphere where China already dominates.

Digital development also provides an insurance policy for China that, if it conflicts with global regulations and is subject to sanctions, it will still have a way to conduct business transactions.

Getting more countries to join together to facilitate cross-border payments through a multi-central bank digital currency bridge, or m-CBDC, “could improve [China’s] regional influence over time, “said Adarsh ​​Sinha, Bank of America currency strategist, in a note to clients.” Ultimately, this is likely to be China’s real (and more realistic) goal than any serious attempt to displace [U.S. dollar’s] status as a global reserve currency. “

China will need a “compatible and coordinated system” to use the People’s Bank of China digital currency, and there are already signs from other central banks that a move is imminent in the field, Sinha added.

There are signs of movement elsewhere.

Thailand, for example, will begin testing its own retail digital currency to the public next year, with full deployment designs in the next three to five years.

This week, Japan also began experimenting with ways to integrate a digital currency into its system.

No threat, still

In the United States, however, the level of urgency seems less.

Nick Colas, co-founder of DataTrek Research and, in a previous paper, the first Wall Street analyst to write about bitcoin, said that a recent customer survey showed only a medium level of enthusiasm for a central bank digital currency in the US. USA

A customer base of around 300 with a penchant for disruptive technologies was evenly split on whether the Fed should accelerate its CBDC schedule, Colas said.

“Investors are hearing the Fed talk with some reluctance about CBDCs, they listen to them talk about risks, and they are internalizing that and saying, ‘If the Fed sees risks, maybe we shouldn’t go so fast,” Colas said. . “People have come to realize that the Fed is struggling with the problem, and if the Fed is struggling with it, it’s not something to rush into.”

There are undoubtedly voices calling for faster action from the central bank.

Global payment processor Ripple, which issues its own XRP coin, has written a report strongly encouraging the US to move forward.

The firm noted, among other things, that getting emergency ransom payments to people in the early days of the Covid-19 pandemic would have been much easier with a digital currency available to the government.

“[Central bank digital currencies] they have enormous potential, but they must first overcome numerous challenges, “said the Ripple report.” Now is the time for central banks to explore these problems, develop common solutions, and ensure that the next evolution of money benefits more people and businesses and improves the world. “

But the Fed is likely to continue to take its time, despite doubts about whether China’s move threatens the global position of the United States and the dollar.

“Now and for the next five years, it is not like that,” Colas said. “In the past five years, if China’s economy continues to grow as it has for the past 10 years, if its share of world trade stays the way it is and people start embracing it, in the long run, sure [it’s a threat]. But it is not a short-term risk. “


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