China creates its own digital currency. A greater threat than an atomic bomb
Chinese authorities are experimenting with their own centralized digital currency, which could shake the global financial system, weaken the domination of the dollar and limit the impact of US sanctions. Chinese officials talk about “monetary sovereignty”, but there are also opinions that it is “the greatest threat to the West” in decades.
Beijing has not announced when the digital yuan, or e-CNY, will be officially launched. However, the authorities are already testing the new electronic currency by handing out small amounts of e-yuan to residents in lotteries to spend in participating stores and restaurants.
Virtual currencies could reorganize the foundations of the financial system in a similar way to how Amazon changed retail sales and Uber shook the taxi industry, writes the US Wall Street Journal. China has taken the lead in developing such a currency.
Money might appear to be digital now, as credit cards and payment apps eliminate the need to carry notes and coins in your wallets. However, these are only tools for electronic money transfers. China, on the other hand, is working on a completely virtual, legal tender.
The advent of virtual money heralded the emergence of bitcoin and other cryptocurrencies. However, these operate outside the traditional financial system and are not fully-fledged means of payment recognized and issued by governments.
When bitcoin was launched in 2009, economic officials in most countries downplayed the new currency. The Chinese watched her with attention and distrust. Beijing has banned cryptocurrency trading in mainland China but began researching into creating its own virtual money in 2014.
What is E-CNY?
E-CNY is different from cryptocurrencies. Unlike decentralized bitcoin, it is managed by the People’s Bank of China. Consequently, it does not provide users with complete anonymity but, on the contrary, gives authorities additional opportunities to track financial flows in real-time.
This could allow authorities to spot suspicious transactions and catch tax evaders, and even automatically enforce fines and tickets. In the case of an authoritarian communist state like China, however, there are concerns about adding them to the arsenal of means used to suppress voices and persecute dissidents.
The digital central currency also opens the way to completely new tools of monetary policy. In the experiments with e-CNY, the “validity period” of the money distributed in the lottery was limited, and in the future the authorities will theoretically be able to make their value gradually decrease, for example, to encourage people to turn their funds faster in times of economic downturn.
Chinese officials also suggest that electronic yuan will be used in international transactions, which in the long term is seen as a threat to the dollar’s dominance. Currently, the US currency is used at least 88%. such transactions, and the Chinese yuan — only 4 percent.
E-CNY could be donated by members of poor and marginalized communities without bank accounts. It would also make it possible to make transfers without the knowledge of the US government, and this would weaken the impact of sanctions imposed by it on foreign entities, including increasingly Chinese companies and individuals.
American sanctions isolate the economies of North Korea and Iran. When the Burmese army launched a coup in February, Washington blocked junta commanders from transferring money between banks. The head of the pro-Beijing Hong Kong administration, Carrie Lam, complained on television that she kept home “piles of cash” because she did not have a bank account due to US sanctions.
However, e-CNY transfers would not require an account. They would also take place outside the SWIFT network used by commercial banks and which Washington has access to. For this reason, according to WSJ, some members of the administration of US President Joe Biden see the digital yuan as a greater threat than North Korean nuclear bombs.
A similar opinion was recently expressed by the American financier Kyle Bass, founder of Hayman Capital Management, known for his critical attitude to the Chinese Communist Party (CCP). “I believe that the digital yuan is the biggest threat to the West that we have faced in the last 30–40 years, and this is because it allows China (…) to potentially export its digital authoritarianism” — assessed Bass, quoted on the financial portal MarketWatch.
Not everyone agrees with Bass. However, many commentators believe that the West should prepare for Chinese digital money and develop its own electronic currencies such as digital dollars and euros.