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China’s CBDC is about domestic dominance, not beating the dollar

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Experts are already called central bank digital currencies (CBDC) as one of the most important trends that will define the future of money in the next decade. For high-income countries, digital currency is an exercise in geopolitical risk management.

According to analysts, developed countries, in which the use of cash is decreasing, consider CBDC as an alternative to traditional payment methods, which reduces costs, increases the efficiency of monetary policy, and increases the competitiveness of the payment market. And for countries with developing financial systems, CBDC can become a means of improving the availability of financial services, their democratization and greater digitalization.

Dozens of countries are exploring the possibility of launching CBDC, but China has gone farthest – the country has already started testing digital yuan. Moreover, experts note that if the US does not pay attention to the new technology, the country risks losing its dominant position in the global financial system.

CBDC development race between China and USA

Many have framed the development of CBDC in China and the US as a race — in which case, China is clearly closer to launch and, hence, the “winner.”

Undoubtedly, there is serious competition in technology between the US and China. Despite this, China’s payments industry has not seen the international penetration needed to create a real threat to the dollar.

The dollar is unlikely to ever lose its leadership role. Сompanies and banks will continue to need it to reduce the risk of currency depreciation in international transactions. But CBDC threaten the “most fragile” aspects of currency dominance: cross-border transfers, as well as payment system SWIFT.

The yuan simply has no potential yet to claim the place of the dollar. Even digitally, it will remain the Chinese currency. Unlikely that the digital yuan would be able to grab a significant market share, even taking into account its advantages.

The yuan is not a freely convertible currency, its exchange rate is significantly limited by government intervention. The authorities are not interested in changing the situation. The growth in demand for foreign currency would greatly hurt local exporters. Hence the modest interest of traders and investors in the currency. As long as the Chinese authorities manipulate and undervalue the exchange rate, the yuan will not be able to claim the role of a global reserve currency.

Therefore, China’s CBDC is more about domestic dominance, not beating the dollar.

For the yuan to oust the dollar from the top spot, it must become another currency. To do this, China must make more progress in its transition to a market economy. Namely: improve corporate governance and develop efficient, well-regulated financial markets that deserve the respect of international investors. So that Beijing can remove capital controls and transform the yuan into a market-driven currency.

Conclusions

China’s CBDC may not threaten the dollar’s primacy, but it does contribute to the international recognition of the yuan. There are many Chinese companies operating in the developing countries of Africa and Latin America. The digital yuan is likely to be a popular currency there.

When it comes to the dominance of the dollar, the main risk comes not from China, but from the United States itself. The status of the dollar reflects the reliability and strength of the American political and economic system. To maintain the dollar’s position, it must remain stable and set an example for the rest of the world.

In conclusion it should be noted: CBDC is the future of the global financial system. This is the result of the gradual evolution of fiat payment systems. CBDC don’t have to be on the blockchain. But they have one of the main advantages of cryptocurrencies – the ability to pay each other directly without intermediaries, without their disadvantages in the form of volatility and lack of legal protection.

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