Despite some initial misgiving and resistance, cryptocurrency is now a legitimate form of currency that is going to continue to play a more important role in world finance. One of the biggest examples, and most controversial at the same time, is the introduction of the digital yuan by China’s government. Jason Simon, a FinTech and cryptocurrency expert, explains why China’s progress with its digital currency could prove to be problematic.
A recent YouTube vlog prepared by The Wall Street Journal breaks down what China is accomplishing with its digital currency. The country introduced a pilot program to citizens last year that is being used to test the feasibility of China going completely digital with its money, eliminating entirely all physical coins and bills. Currently, there are around 750,000 citizens participating in the pilot program, with approximately 10,000 merchants onboarded.
The benefit of the digital yuan is that it is faster than debit cards and has zero transaction fees for merchants, although that could potentially change in the future. It can also help reduce terrorism financing and money laundering. However, that is where the benefits end. Explains Simon, “China’s digital yuan, a central bank digital currency, is 100% trackable by the government. The central bank will know who is spending money, when it’s being spent and where it’s being spent. If all cash and coins to be replaced by digital yuan, as expected, it will give the government the ability to analyze all activity from its citizens.”
Additionally, it is possible that the digital currency could come with a few hidden switches. For example, it could include an expiration date that would force consumers to make purchases or risk losing their money. In addition, the government could easily cut off individuals’ access to money for any of a number of reasons it deems valid.
There are already 770 million mobile payment users in China, so the idea of using a CBDC is not completely new. However, the digital yuan takes the idea to an entirely new level that has global implications, as well. Asserts Simon, “China plans on making its currency completely digital and there has also been talk about forcing businesses to only the digital yuan, even for international trade. This would require foreign business elements to be able to transact with the digital yuan, which is something that is currently controlled on various levels. Forcing the use of the country’s digital currency on the international trade industry could disrupt supply lines and make trade more complicated and, possibly, more expensive.”
China is expected to roll out its digital yuan next February during the 2022 Winter Olympics. The goal is to showcase the country’s ability to be a pioneer in the world of economics, even if the solution has not been completely tested. However, 86% of the world’s central banks are exploring CBDCs of their own and someone has to be first. China expects to be able to claim that position and expand on it, becoming the first country to move its entire currency infrastructure to the digital space.