China’s Digital Currency: Kicking off a Horse Race

Whether this new digital currency will be transformed into a mean of surveillance, or whether the main driver for its construction is the political project to extend the surveillance state even further, is yet to be seen. However, what can be said is that the current design of the digital currency favors a system, which allows for more control over its citizens.

How does the Chinese initiative fit within the global eco system of crypto / digital currencies?

Eric Chaney

While cryptocurrencies and tokens based on various blockchain technologies have left central banks and regulators skeptical and pondering whether these financial innovations should be considered as pseudo-currencies, commodities or financial assets, the Libra project triggered a knee-jerk reaction from officials, central bankers as well as elected bodies such as the US Congress. The G7 commissioned a report on "global multicurrencies stablecoins" (a fig leave for Libra), by a committee chaired by ECB board member Benoit Coeuré. Made public in October 2019, the report is not closing the door to global stable coins but has set the regulatory bar quite high. As for garden variety stable coins (mono-currency), the report mentions nine areas of concerns, from governance to money laundering, market integrity, data privacy or tax compliance. And for global stable coins (multi-currency), it mentions four additional risks, including monetary policy and financial stability, no less!

This unanimous call to arms by central bankers and other officials, has thrown buckets of cold water on the Libra project. Testifying in front of the House Financial Services Committee on October 23, Mark Zuckerberg back pedaled as much as possible, indicating for instance that, in a first stage, Libra could be backed with US dollars assets only and that he would comply with whatever regulation comes. Yet, it seems clear to me that the Libra association, even after having suffered from high profile defections –Visa, MasterCard and eBay—is not throwing the towel and is ready to recalibrate the project in order to keep it going, although with a less ambitious and, probably, delayed agenda.This is a boon for the central banks which have already made public that they were considering the possibility of issuing Central Bank Digital Currency (CBDC, renamed DCEP by China’s PBoC), the Bank of England, the Swedish Riksbank and the Peoples’ Bank of China being at the forefront.

Chinese authorities seem to have seized a unique opportunity, both on the defense side  - against cryptocurrencies including Libra - and the offensive side, by allowing its own technology giants (Alibaba, Tencent…) to gain traction in the digital currency battleground.

As for the other central banks planning to experiment CDBCs, the Chinese initiative is probably seen as a godsend: issuing a government-backed digital currency will certainly make the headlines but it is hardly a fundamental game-changer. On the other hand, it is a path full of booby-traps that they will be happy to observe from the outside. Overall, the Chinese initiative, if implemented, will accelerate the issuance of government-backed digital currencies in other constituencies, including the euro area, in my view.

Two US lawmakers have recently called for a US digital dollar managed by the Fed. Are we going to see another confrontation between the US and China, this time on the digital currency battlefield?

Eric Chaney

First of all, the US dollar is and will remain for the foreseeable future the world currency, no matter how hard euro-area or Chinese leaders try to challenge its dominant position. There are very objective reasons for that: a global currency must be backed by a large, deep and highly liquid pool of safe assets (government bonds) and must be free to cross borders. The euro area lacks the former quality and will lack it until the peoples of the countries composing the monetary union decide on their own will to move towards a political (and thus fiscal) union. That may or may not happen, but I would bet that if it does, it will be in the distant future. As for China, opening its borders to the free movement of capital is a necessary condition to make the renminbi a world currency. As the recent past has shown over and over again, as soon as Chinese authorities open up their capital borders, even marginally, wealthy Chinese rush to save their assets abroad, something Xi Jinping cannot tolerate. It is therefore very unlikely that Chinese capital borders will fully open up any time soon, which implies that the renminbi is no candidate to challenge the US dollar. Another consequence of the dominant position of the US dollar is that American policy makers have little incentive to take the risks associated with issuing a digital dollar. A digital Swedish krona is one thing — it matters almost only for domestic use — a digital US dollar is a totally different ball game.

Second, the technology battle between China, the US and other constituencies, Europe in particular, but not only, cannot but intensify in the coming years. Digital currencies are just one of the fields where the battle will take place. Knowing that the US is likely to be reluctant to enter the digital currency world, Chinese authorities may infer that they have a card to play, not to make the renminbi a genuine global currency, but to cover the technological ground left by the US, at least within its own sphere of influence and perhaps even farther.

Last, I do not see why the euro area should remain in the back seat. Once China has dealt with its digital currency teething troubles, the ECB should be smart enough to issue its very own digital euro, provided of course that it is backed by its owners.

Copyrigth : ROBYN BECK / AFP