While the United States has often been at the forefront of technological advances, this has not been the case with regard to the digitalization of its national currency. For the most part, policymakers have failed to see the industry in a promising light that has led to the Western Superpower lagging behind its Eastern counterpart.
As the US and China continued to lock horns, in the digital race, it was the latter that appeared to be way ahead. Its trump card? Digital RMB.
The first mover in the space
China has already begun testing the digital Renminbi [RMB] as well as educating citizens about using it. In addition to running trials of the central bank-issued digital currency, it was also reportedly working towards normalizing it across media.
China is starting to test the Digital RMB and educate its citizens. 🇨🇳
This video is circulating WeChat: China's digital currency in action w/ the Agricultural Bank of China
The woman takes out 50RMB from her bank card & converts it into China's new digital RMB pic.twitter.com/Tnxf11dyo7
— Maria Shen (@MariaShen) August 19, 2020
The country has been working on digital RMB for the last six years. It was the growing popularity of Bitcoin that triggered the development. Expanding the “Blockchain and not Bitcoin” narrative, China is all set to increase convenience, security, and anti-counterfeiting level of retail payment, thus accelerating the development of its digital economy.
However, empowering its country’s economy isn’t the only factor that has bolstered the release of its digital currency. One of the many thoughts that Chinese policymakers have in mind is to increase the influence of RMB.
On the other hand, the US is nowhere near with a Digital Dollar. Even the discussions around it were spurred the call to action because of the coronavirus pandemic and Facebook’s Libra.
President of Chamber of Digital Commerce, Perianne Boring, had earlier stated that if the US does not adopt the ” best technology underpinning the country’s financial system and another country leap-frogs their infrastructure, this could jeopardize US’s standing on the world stage.”
Seeking global dominance
With its CBDC, China is set to become the first country in the world to offer a digital sovereign currency. There are candidates already lined up to roll out the CBDC on a large scale, for example, Didi Chuxing the country’s largest ride-hailing platform, food delivery giant Meituan Dianping to name a few.
On the surface, it looks like China is heading for CBDC utilization for domestic purposes. However, it is no secret that China is not quite satisfied with the US Dollar’s dominance and reach in the global financial system.
Let ‘s look at China’s brief timeline overtaking the US over the last decade. It claimed to have “overtaken” the US as the world’s largest trader of goods in 2014. As stated in the book Renminbi Internationalization, China has reportedly implemented a pilot scheme to expand the use of its national currency for trade settlement with the Southeast Asian nation, which later materialized.
However, the main milestone for RMB was when the IMF added the currency to the Special Drawing Right [SDR] basket, an international reserve in 2016.
World Money and Power Politics
One of the most crucial ways in which China seeks to spread the money and rise up as a strong contender to the US Dollar is through the Belt and Road initiative. According to a paper released by Kiel Institute for the World Economy last year, China reportedly holds more than $5 trillion of debt owed by other developing or low-income nations. This is again just an estimation, nearly half of China’s loans go unreported.
While this may bring in repayment failure concerns by the countries in debt, it is one way for China to “internationalize” RMB.
Speculating on the rise of China’s CBDC along the same line, Lucy Gazamarian, Co-chair of the blockchain committee of the FinTech Association of Hong Kong recently stated,
“If [China] wants its currency to flow more freely outside of its own borders, it has the technological capability to do that. There’s so much trade happening in the Belt and Road [Initiative], 60-plus cities, and there is not a universal currency.”
Gazamarian stated that the USD still needs to be translated and most huge transaction need to flow through the USD and further added,
“So there is a case for the CBDC to become a universal payment instrument in emerging countries as part of the Belt and Road, then [maybe] it could rise up as the world’s reserve currency for emerging countries.”