China Jumps Into Central Financial institution Digital Forex; The US is shifting slowly

The city of Beijing is starting a test of the PBoC’s digital currency during the Lunar New Year 2021, as shown by a screenshot of a login page in JD’s shopping app.

Evelyn Cheng | CNBC

China’s leadership in digital currencies is bringing more focus to US initiatives, but similar efforts in the US are unlikely anytime soon.

As China enters the still sparsely populated world of central bank digital currency, China is taking and establishing a society that is already heavily reliant on electronic payments. This also gives the government a crystal ball in the spending habits of its citizens and gives the national currency an edge on the global stage.

On an even bigger level, the move raises concerns that the yuan is now an even bigger challenger to the US dollar, which is considered the world’s reserve currency, in which much of international trade is denominated.

Federal Reserve officials have entered the digital currency arena cautiously, however, and this is not expected to change despite the additional heat from China.

Fed chairman Jerome Powell recently said the central bank would do nothing about this without the approval of Congress. A joint project between the Boston Fed and MIT is still in its early stages.

“I just don’t think that’s going to change that much, to be honest. They’re two very different systems you’re dealing with between the US and China,” said David Grider, director of digital assets research at Fundstrat . “I don’t necessarily think this will change the dynamics for the dollar’s role in the world, which is likely one of the reasons [Powell is] not in such a hurry. “

Still, there is a danger that the US will lag behind the world globally if it ignores the disruptive nature of digital currencies.

Less than a decade ago, it seemed unlikely that Bitcoin and its peers would ever be anything more than a curiosity. According to CoinMarketCap, which tracks the value of the sector, the various cyber currencies are approaching a collective market capitalization of $ 2 trillion.

The benefits of adoption

Digital currencies have several advantages.

They provide access to the financial system for people who cannot afford accounts or otherwise have no access to banks.

At a time when the total volume of digital transactions is expected to reach $ 9 trillion in just a few years, developments would allow governments to keep up to date with payment systems like WiPay, AliPay and SwiftPay, which is already happening worldwide happened.

But there are also privacy concerns. Central bank digital currencies do not work like Bitcoin and other cryptocurrencies because transactions would not be anonymous. Fed officials have raised concerns about privacy issues and their implementation.

However, global interest in digital currencies hasn’t stopped this.

At the very least, China’s lead in the central bank’s digital currencies space is breathing down the dollar’s neck a little when it comes to cross-border payments.

This influence is more likely to be felt in the immediate Asian sphere, in which China already dominates.

The digital evolution also provides an insurance policy for China which, if it violates global regulations and is subject to sanctions, still has the ability to do business.

Bringing more nations on board to enable cross-border payments through a digital currency bridge with multiple central banks (m-CBDC) could improve [China’s] regional influence over time, “Adarsh ​​Sinha, currency strategist at Bank of America, said in a statement to clients.” Ultimately, this is probably the real (and more realistic) goal for China than any serious attempt to suppress it [U.S. dollar’s] Global reserve currency status. “

China will need a “compatible and coordinated system” to use the People’s Bank of China’s digital currency, and there are already signals from other central banks that entry into the field is imminent, Sinha added.

There are signs of movement elsewhere.

Thailand, for example, will begin testing its own retail digital currency for the public next year. The drafts will be fully implemented over the next three to five years.

This week, Japan also began experimenting with ways to incorporate a digital currency into its system.

No threat yet

In the US, however, the urgency seems to be less.

Nick Colas, co-founder of DataTrek Research and in a previous job the first Wall Street analyst to write about Bitcoin, said a recent customer survey showed only mediocre enthusiasm for a US central bank digital currency

A customer base of around 300 customers with a penchant for disruptive technology was roughly evenly split over whether the Fed should speed up its CBDC schedule, Colas said.

“Investors hear the Fed talking somewhat reluctantly about CBDCs, how they talk about the risk, and they internalize that and say, ‘If the Fed sees risk, maybe we shouldn’t be moving this fast,” Colas said. “People have taken up the fact that the Fed is grappling with the problem, and when the Fed is grappling with it, it’s not something to rush into. “

Of course, there are voices calling for the central bank to take faster action.

Global payments processor Ripple, which issues its own XRP coin, penned a report that strongly encourages the US to move forward.

The company pointed out, among other things, that with digital currency available to the government, it would have been much easier to get emergency payments to individuals in the early days of the Covid-19 pandemic.

“”[Central bank digital currencies] They have enormous potential, but first they have to overcome numerous challenges, “according to the Ripple report.” Now is the time for central banks to study these issues, come up with common solutions, and make sure the next evolution of money benefits more people and businesses and makes the world a better place. “

But the Fed will likely continue to take its time, despite questions about whether China’s move threatens the US and the global dollar.

“Not now and for the next five years,” said Colas. “In the last five years, if China’s economy continues to grow as it has done in the last ten years, if its share of world trade remains as it is and people start to take it over in the long term and safely [it’s a threat]. But it’s not a short-term risk. “

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