China Creates a Digital Currency. Joseph LaRosa, Impact Investing Intern, The Ohio State University.

Cryptocurrencies surged in popularity recently due to their decentralized nature, transaction speed, and security. Governments around the world have taken note of this trend and are beginning to rollout nationally backed digital currencies. The first major nation to embark on this journey is China, which announced the Digital Yuan (DY). This federally controlled currency has the potential to disrupt modern financial structures and poses the largest threat to the US Dollar since the establishment of the Euro.

DY allows the Chinese government greater control over the production and circulation of currency. It also adds a means by which the Chinese government can efficiently and effectively transfer funds between citizens, banks, and government entities, all while cutting out the "middleman" in transactions.

Growing tired of a US dollar-driven world, China made a bold leap into the future, hoping to increase their global economic power. US officials have been quick to express their concern, acknowledging that the DY will likely affect the US’s ability to implement economic sanctions on China, lessen the US's ability to track Chinese government funding expenditures, and even poses a threat to national security.

Clearly, from the perspective of the US dollar, broad adoption of the DY would have negative implications. In 2019, a team of veteran policymakers at Harvard University conducted an exercise to create a response to a scenario where North Korea developed a nuclear missile secretly funded with DY. These threats will continue to grow as the Chinese government replaces physical tender with digital currency. (We outlined these factors in 2019. See: Blockchain, Cryptocurrency and the Future of Monetary Policy https://www.prlog.org/12785779-blockchain-cryptocurrency-and-the-future-of-monetary-policy.html)

In our 2019 report, Creative Investment Research provided a basic breakdown of the current global reserve currency market structure and compared this to a forecast of the projected structure in 2031. It is important to note the growth of digital currencies such as Bitcoin and DY.

In our paper, we noted Bitcoin’s success in transforming the global economy by facilitating the (almost) costless transfer of funds between individuals and entities. Given Bitcoin’s deregulated nature and the currency's lack of ties to government entities, we project tremendous growth in its use as a global reserve currency within the next ten years. We project similar, but not as extreme, growth for DY over the next ten years.

Although many want to draw comparisons between these currencies, in reality, they are very different. DY is controlled by the Chinese government and therefore is less volatile. Growth in the currency will be constrained by Chinese monetary policy which will try to control for macroeconomic factors such as inflation. Despite its restricted growth from a foreign exchange perspective, China wants to continue the so-far successful rollout of DY, with the hope of protecting the sovereignty of its currency.

The question is, will the US do the same.

See:

Is FedCoin, a US Government-issued cryptocurrency, feasible? https://www.prlog.org/12772509-is-fedcoin-us-government-issued-cryptocurrency-feasible.html

Blockchain, Cryptocurrency and the Future of Monetary Policy https://www.prlog.org/12785779-blockchain-cryptocurrency-and-the-future-of-monetary-policy.html

Comments to the Reserve Bank of India on Blockchain, Crypto https://www.prlog.org/12765825-comments-to-the-reserve-bank-of-india-on-blockchain-crypto.html

Editor: William Michael Cunningham

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