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China's CBDC Gaining Steam

By Victoria Adams


As China moves towards rollout of its central bank digital currency (CBDC), the Value Technology Foundation (VTF) has been tracking the implications for the Digital Yuan on the US and the world’s financial system and will be soon releasing a major white paper on the topic. While many countries have been experimenting with CBDCs, China is the most advanced and may launch its CBDC very soon. The key reasons for China developing a CBDC seem to be to increase control of the domestic economy, defend the RMB against international cryptocurrencies, and begin to combat the Dollar's dominance as the world’s reserve currency. Based on what we know, it appears to be structured around a two-tier system with the Digital Yuan being distributed to individuals and businesses via commercial banks and the existing financial system rather than directly to the public. The currency promised anonymity and independence from political control, but there is nothing in the design of the currency that ensures this. The Digital Yuan would give the Chinese government potentially huge control over users and would give them access to an unparalleled amount of data on payments and financial flows.


In the short term, the Digital Yuan is more like an insurgency rather than a play to challenge the Dollar’s supremacy. However, combined with the ongoing development of the Belt-and-Road program, the Digital Yuan could emerge as a major payment system for emerging countries in South Asia and Africa. Furthermore, the Digital Yuan could make Western economic sanctions much more difficult to manage and undermine the current global payment system.


In response, the U.S. needs to work with its allies and partners to help them understand the challenges posed by the Digital Yuan. This should consist of high-level contacts to ensure that other government understand the threat of the Digital Yuan and what involvement in Chinese payment systems means for their economies and for the future of their relationship with the U.S. financial system. There should also be a program of training and information outreach to lower-level government officials, regulators, and leading members of the private sector and civil society in other countries (especially in South East and Southern Asia and Africa) to make sure they understand the danger of the Digital Yuan and what they need to do to protect their economies.


Image Credit: coingeek.com


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