China leads the world in new state-backed digital currencies

The Chinese government is aiming to deploy the world’s first state-sponsored digital currency to control the world’s financial technology.

Important reason: China’s new currency could set a global standard for the use of domestic digital currencies, giving Beijing unprecedented visibility and control over domestic financial transactions.

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  • At least 60 countries expedition Regarding the use of official digital currencies, while the United States is primarily on the sidelines, China is the most advanced in realizing those plans.

what’s happening: The Chinese government has launched a pilot program in Beijing, Shanghai, and other cities to offer a small amount of currency, called Digital Currency Electronic Payments (DCEP), to residents of a lottery system with a limited number of retailers. Did.

  • Chinese officials say they hope DCEP will be widely available in time for the February 2022 Beijing Olympics.

  • Some officials also hope that DCEP will help China’s currency internationalize, but China’s strict capital controls make the yuan unattractive for international trade.

Big picture: Deploying a country’s digital currency has several advantages.

  • Improve the efficiency of the financial system. Cash and coins are inefficient and expensive to store.

  • Systemic risk reduction. “The existing system is owned by a private company and must be paid by Alipay or WeChat. [go] Bankruptcy is very unlikely, but it creates systematic risk, “said Lin Haobao, an analyst at Tribium China. Said CNBC. Government alternatives provide a layer of security.

  • Spur innovation. State-backed digital currencies have the potential to offer many new opportunities for businesses, technology companies, and trade.

But it’s not just about efficiency and innovation. According to January, Chinese officials have revealed that they see digital currencies as an important stage in global geopolitical competition. report According to Yaya Fanusie and Emily Jin of the Center for a New American Security.

  • “Fintech is the pinnacle of global financial competition in the future,” said Van Ifay, Lieutenant Governor of the People’s Bank of China. Said November 2019. “Anyone who knows this high capacity will have the strongest core competence in finance.”

Background: Cryptocurrencies like Bitcoin and Ethereum exist in decentralized ledgers and are intended to circumvent government and corporate control. However, DCEP is directly managed by the People’s Bank of China (PBOC), the central bank of China.

In the hands of authoritarian government Digital currencies also provide unprecedented surveillance and control. “Until now, the government has never had direct access to individual user transactions. Technology does not allow it,” Fanusie told Axios.

  • “DCEP provides a direct route for governments to pay, fund and decouple people from their accounts. Currently, governments need to go through private companies or banks to do that.”

  • This feature can be used to reduce criminal abuse of the financial system, but in theory, persecuted groups such as opposition, human rights activists, Uighurs, and the Chinese Communist Party are engaged in non-criminal activity. It can also be used to monitor and shut down the accounts of other people who are. The party may want to suppress it.

Notable points: DCEP may be reasonably helpful in the internationalization of the renminbi, but it is unlikely to immediately challenge the US dollar.

  • But international DCEP transactions are possible bypass SWIFT is the most widely used international payment system, making it easy for people and governments to circumvent US sanctions.

Dig deeper: What Central Bank Digital Currency Means for Cryptocurrencies

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