DJ EQS-News: Is the US Dollar Going to Be Challenged By the Chinese Central Bank's Digital Currency?
EQS-News / 14/10/2020 / 10:37 UTC+8
Is the US Dollar Going to Be Challenged
By the Chinese Central Bank's Digital Currency?
In the digital age, the future of currency is also getting the public's
attention. On April 16, the Libra 2.0 White Paper was released, which stated
that in addition to being a currency based on a basket of fiat currencies,
the Libra would also be pegged to one single currency. During the same
period of time, the Chinese central bank launched its digital currency.
According to media report, this digital currency was piloted by some large
state owned banks in Suzhou and Xiong'an, therefore making its formal entry
from the digital world into the real world.
The Chinese central bank's digital currency is called DCEP (Digital Currency
Electronic Payment) or CBDC (Central Bank Digital Currency). Based on the
details revealed so far, at its current stage, DCEP is primarily to replace
the cash in circulation (M0). It is backed by sovereign credit and is equal
in value to China's fiat currency - the RMB.
There are many views of the DCEP, the most radical of which is that by
making this move, the Chinese central bank aims to overtake its competitors
through technological means, and DCEP might challenge the US dollar's status
and end its hegemony. As DCEP is becoming a reality, people wonder, what is
the true capacity of DCEP, and how will it change our life or the financial
ecology?
Will DECP challenge the status of the US dollar?
One radical view believes that by being the first to promote a fiat digital
currency globally, China can occupy the dominant position in the area of
global electronic payment. DCEP therefore represents not only progress in
fin-tech, it will also be a shock to the US dollar's status as the tool of
international settlement. In this view, DCEP will not only challenge the
status of the US dollar, it will also accelerate the global de-dollarization
process. Against the backdrop of the US-China trade disputes, this political
consideration is particularly easy to gain currency.
However, the fact is, a currency's international standing depends primarily
on the country's comprehensive national power and the degree of health and
stability of its economy, instead of the form the currency takes.
Although DCEP, to a large extent, can increase the RMB's convenience of use
in electronic payment, convenience is only one of the factors people
consider in using a currency. Equally important are the stability of the
currency's value, and the degree of identification with the currency by the
other parties involved in a transaction. Although the US economy has seen
big fluctuations this year with the twin shocks of both Covid-19 and oil
crisis, US dollar continues to be the dominant currency in the international
market. While it is a nice aspiration to have the DCEP weaken the hegemony
of the US dollar, the only sure way to raise the RMB's international
standing is through economic development and the strengthening of China's
comprehensive national power. The overly high expectation of DCEP is
actually beyond its designed capability.
In terms of a currency's scope of use, whether the DCEP will be used
extensively remains to be observed. Compared with digital currencies such as
the Bitcoin, which have already been in operation, DCEP is yet to be
extended to large-scale use. DCEP not only has to compete against
traditional paper currencies, it also faces competition from non-fiat
digital currencies such as Bitcoin. Yet DECP's advantages over these other
currencies are not very obvious.
Meanwhile, China is not the only country promoting central bank issued
digital currencies. Advanced economies such as the US, Europe and Japan are
also making digital currency plans. If many countries come up with their
digital currencies down the road, the global market will see competition
among digital currencies of the major economies.
Based on the above, whether DCEP can gain widespread use depends on how its
competitiveness can be increased. However, its competitiveness is yet to be
seen at this stage. Moreover, it takes a long time for a currency to go from
pilot to general use. For these reasons, people should not have too high an
expectation of the DCEP in the short term.
In terms of giving China more power in influencing international financial
discourses, DECP is yet to touch upon the needed deep level financial
reforms. It is some people's opinion that the launch of DCEP enables China
to occupy the high ground in global digital currency or even block chain
innovation. This makes sense, but to give China more influence in
international finance, deep level financial reforms cannot be avoided, as
integration into the global financial system is the precondition for
increasing China's power in global financial discourses.
With important reform measures such as the marketization of RMB exchange
rate and capital account convertibility still in the air, DCEP cannot
substantially give China more power in global financial discourses without
the successful implementation of financial reforms and open-up at the same
time. On the contrary, financial innovations stimulated by DCEP may end up
increasing regulatory difficulties and creating new constraints on related
reforms.
In terms of international currency system reform, DCEP will not necessarily
be able to push the current system towards revolutionary changes. The
challenges facing the current US dollar dominated international currency
system are becoming more and more prominent, the reasons for which are very
complex, but at the deepest level, it is because the international currency
system is based on a sovereign credit currency. The US dollar, serving as
both an international currency and a sovereign currency, faces the dilemma
of having to serve the economic and social development needs of the US,
while safeguarding the stability of international reserve.
To solve the problems in the current international currency system, a
super-sovereign currency must be constructed. Viewed from this perspective,
the birth of DCEP has not addressed the real challenge, i.e., having a
sovereign currency serving as an international currency.
Digital currency in the age of digital economy
Although the impact of DCEP may fall below some people's expectation, and
won't necessarily cause revolutionary changes in the current international
currency system, this does not deny the importance of DCEP. It can be said
that DCEP is precisely the link to the digital age. While the birth of DCEP
itself is not revolutionary, its full traceability feature, closely
connected with blockchain, might re-construct the exchange system in the
digital economy world, and stimulate the unleashing of a new generation of
potentials of the digital economy.
A digital currency's importance lies in the fact that it combines the basic
features of a currency and fixes the disconnection between the old currency
system and the new digital economy. Under the conditions of an advanced
commodity economy, a currency has five major functions, i.e., measure of
value, means of value circulation, means of value storage, means of value
payment, and currency of the world. In the operation system of the future
digital economy, a new generation of international currencies still needs to
have the above features. Meanwhile, strengthening the integration of a
digital currency with the development model of a digital economy to help
unleash the growth potential of such an economy is still important. Because
a digital currency is in the form of electronic payment and is easy to use
globally in a digital format, a digital currency itself does satisfy the
function of being a world currency.
First, as measure of value, any digital currency must maintain value
stability. DCEP is backed by China's sovereign credit, and will consistently
keep its value stable through the 1:1 exchange rate with the RMB. According
to Libra White Paper 2.0, Libra might be pegged to a sovereign currency to
maintain value stability. In comparison, crypto currencies like Bitcoin and
Ethereum are not anchored and experience wide value fluctuations, making
them difficult to serve as currencies in the future digital economy.
Secondly, as means of value circulation, any digital currency must channel
the flow of the data element. On April 9, 2020, the Opinions of the Central
Committee of the Community Party of China and the State Council on
Constructing A More Perfect Market-oriented System for Allocation of Factors
was promulgated. That was the first time that data was listed together with
land, labor, capital and technology as the 5 factors. Although at the
current stage, DCEP focuses more on replacing paper currencies, it will not
be limited, mid- and long-term, to only purchases of physical commodities
and offline assets.
Thirdly, as means of value storage, any digital currency must connect the
pricing of digital assets. With the addition of the data factor, the
participating entities of an economy will make generalized digitalization
transformation an reality, at which time huge amount of digital assets will
be born, while blockchain technology will become the key to the rational use
of digital assets. Problems of property rights determination and rent
seeking existing in the traditional Internet economy will result in the need
for a great deal of legal and regulatory safeguards after digital assets are
formed, therefore hindering the production and circulation of digital
assets.
Lastly, as means of value payment, any digital currency must unleash digital
payment's potentials. Although DCEP is not based on block chains, through
its specific issuance and management models and technical constructs, it
still retains the basic features of a cryptocurrency, including anonymity,
security, unforgeability and anti-double spending.
"One currency, two databases, and 3 centers" is DCEP's core operation
framework. One currency means there is only one DCEP, a fiat digital
currency backed by the credit of the Chinese central bank, and exchanged at
equal value with the RMB; two databases refer to the issuance database and
the commercial bank database, which constitute the 2 layered operation
system of DCEP. This means that the central bank only manages the issuance
database and exchanges DCEP with commercial banks instead of directly facing
the public; three centers refer to the certification center, the
registration center and the big data analysis center. The registration
center records DCEP flow and ownership; the certification center verifies
identity; these two centers are independent of each other, thereby
safeguarding the anonymity of DCEP transactions. With regards to suspicious
transaction records, only the central bank has the final tracking right and
can effectively control illegal transactions such as money laundering. The
above controllable anonymity continues paper currency's transaction
features, while stops the possibility of DCEP become involved in illegal
actions.
Because of the above, DCEP also provides an important method in balancing
between technological innovation and contemporary governance issues. At the
same time that technological revolution is bringing tremendous increase in
economic and social efficiency, it may also cause big shocks to contemporary
governance models. The use of non fiat digital currencies such as Bitcoin in
drug trafficking, guns and ammunitions and money laundering has alerted
people that attention must be paid to the negative shocks or risks posed by
technological innovation.
DCEP, as a vivid case of an official act to balance against the advantages
of digital currencies such as Bitcoin and their impact upon contemporary
international currency system, has provided an important experience to the
international community in how to have a coordinated response to the
negative shocks brought by technological revolution while simultaneously
unleash its maximum positive effects.
A look at human history shows that the development of currencies has 3
stages. The 1st stage was the age of commodity credit currency, which
reached its zenith with the establishment of the status of gold; the 2nd
stage is the sovereign credit currency system represented by the USD. In the
future, human currencies will enter into the 3rd stage in which digital
technology and state sovereign credit are combined.
The new generation of digital economy, with digital currency as its
infrastructure, is the key to increasing a currency's international
competitiveness. DCEP has updated the form of currencies and made RMB easier
to get, carry and use; it is also more efficient in settling transactions.
Even though DCEP's impact might turn out to be lower than what some people
have expected, it is undeniable that DCEP has many unique advantages that
are different from a paper currency.
Human societies are in the midst of the transformation from physical into
digital world. Even though people's production and consumption habits are
gradually being reformed by digital technology, a digital economy is not
just a simple industrial revolution. The older orders, old ideas and old
strata rooted in the traditional economic models cannot fully adapt to the
ways of value creation in the digital world. In the post-pandemic world, to
ensure the continued success of DCEP, we will still need to face many
technological difficulties and constraints from traditional models.
The age of digital currencies ignited by block chain technology has already
become an unstoppable trend, not only to the Chinese central bank, but also
to the US Federal Reserve and the central banks of other countries. In the
face of this trend, no country can afford to avoid the issues of how to
promote, in a secure and effective manner, the use of a digital currency in
one's own country and its settlement and operation in the international
financial system.
About the Author
CHEN, Gen, renowned FinTech scholar, popular technology author and
successful financier in China and Hong Kong SAR.
Chen is an invited professor of Beijing University, postgraduate student
advisor of Beijing Forestry University, Visiting Professor of Nanjing
University of Aeronautics and Astronautics. He is a media commentator of
China Daily,
China First Financial Magazine.
Chen has undertaken a number of projects entrusted by China's National
Ministries and Commissions, involving financial technology, financial
services, real estate and other fields. He was commissioned to conduct
research and lectures by General Electric of U.S., the United States Wall
Street Stock Exchange, NASIDAQ, Samsung, Hyundai, LG, Volvo, Siemens,
Mercedes-Benz, China Securities Regulatory Commission, Hong Kong Stock
Exchange, Hong Kong Securities Regulatory Commission, Apple, Google, IBM,
Agricultural Bank of China, China Life Insurance, Bank of Communications,
Citibank, Xinhua News and CCTV.
File: Is the US Dollar Going to Be Challenged By the Chinese Central Bank's
Digital Currency? [1]
14/10/2020 Dissemination of a Marketing Press Release, transmitted by EQS
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(END) Dow Jones Newswires
October 13, 2020 22:37 ET (02:37 GMT)
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