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China’s digital currency may not conquer the present financial ecosystem which has already been controlled by the United States dollar, however, the central bank digital currency (CBDC) project is a good foundation for world economies to build on.
Back in March, the Peoples Bank poof China (PBoC) launched the testing phase for its state-issued digital currency. The test, which is stipulated to be conducted in the Chinese cities of Suzhou, Shenzhen, Xiong’an, and Chengdu and will entail the transfer of remuneration to state employees in the embodiment of the new CBDC.
China’s digital currency to derange the contemporary financial order?
The PBoC is planning for the central bank digital currency to be ready for use before the 2023 Olympics which will be held in an Asian country, takes place. China’s decision to develop a digital currency created waves among the policy community. Back on April 20, China commenced on the first testing stage of the CBDC. Following the launch of China’s digital currency, a report by the state media outlet, China Daily, stated that:
“A sovereign digital currency provides a functional alternative to the dollar settlement system and blunts the impact of any sanctions or threats of exclusion both at a country and company level”.
Despite the increased fuss on China’s digital currency threatening the contemporary financial system, there are several reasons to hesitate on this quickness and extent of this rather long declaration. Firstly, as illustrated by Kenneth Rogoff, a professor of economics at Havard, the present dollar dominion is backed by “America’s deep and liquid markets, its strong institutions, and the rule of law”.
The professor’s observation becomes evident in the September 2019 Bank of International Settlements (BIS) study. As per the survey, the United States dollar holds onto its supreme currency reputation, being on one side of 88 percent of the entire trades, the SWIFT banking network, and as the report points out, dominating the worlds’ bank-to-bank money transfers,
The Chinese renminbi is the eighth most traded currency
Chinese renminbi, which is popular as yuan, is the eighth most traded currency in the world. Basically, the reason behind this is highlighted by Professor Rogoff who states that: “China’s burdensome capital controls, its limits on foreign holdings of bonds and equities, and the general opaqueness of its financial system leave the Yuan many decades away from supplanting the dollar in the legal global economy.”
All in all, the subject of China’s digital currency begs for additional probe and given it will not depose the current financial order should not restrain us from questioning the inherent value proposition of a cryptocurrency. Back in 2019, ex-PBoC digital currency head, Yao Qian, made a captivating case for CBDCs. His observations should hold great weight to countries seeking to create a central bank digital currency.