China is taking the lead in the race towards sovereign digital currency. This will have big social and economic ramifications and will serve as a wake-up-call to other nations — especially the US.
An article I wrote on cryptocurrency back in 2018 theorized that: 1) Facebook would attempt to launch a cryptocurrency and 2) China would be the first nation to get serious about issuing its own sovereign digital currency. I’m not always right, but after this year it is certainly the way the wind seems to be blowing. We recently witnessed Mark Zuckerberg testifying in Congress about Libra, Facebook’s controversial cryptocurrency. This was quickly followed by the Chinese President Xi announcing, for the first time, that China will make large scale investments into blockchain technology projects. So what could the macroeconomic consequences of such major developments be? And what could this mean for you?
Chinese Digital Currency
Be under no illusions of China’s intentions when it comes to blockchain technology. Regardless of how much rhetoric the Chinese is pushing against ‘cryptocurrency’, a Chinese Digital Currency is happening. China has already built the two foundational pillars of a digital nation: payments and identity. What’s more, this has been done on an astonishing scale, with messaging and payment super apps like WeChat and Alipay embedded into the daily lives of over a billion people. From the nation’s internal perspective, China’s digital currency would enable the state to have unprecedented visibility into granular and individual economic activity. This access creates the ability for the state to analyze citizens’ payments and online activity, greasing the wheels of ‘social credit’ scoring. This type of financial surveillance would be on a scale that’s only been imagined, but never been seen before. Not only could it have very significant social ramifications, but would certainly catch the attention of other global superpowers. That said, it will be the external impact that a Chinese digital currency will have on international finance that will really cause other countries, like the US in particular, to wake up and smell the Renminbi.
The US Reaction
There’s been a very vocal response by the leaders in the United States concerned over Facebook’s Libra cryptocurrency. In reality it’s not a serious threat to the hegemony of the US dollar — if US authorities want to shut it down completely, they will. Facebook is under ongoing scrutiny and has a number of challenges to face before it could bring a cryptocurrency to the market in a meaningful way. The Chinese digital currency, on the other hand, could present a real existential threat to the dollar’s position as the world’s reserve currency. To qualify that sweeping statement, in terms of large-scale international trade, the position of the US dollar is unlikely to be challenged for some time; its position is underpinned by a depth and quality of financial markets, institutions and rule of law which China realistically can’t match right now. That said, over time a Chinese digital currency could enable an alternative and more efficient mechanism for settling international transactions and this would undermine the current reliance on clearing via US dollars. Furthermore, there are many areas of the global economy where it’s not hard to imagine a Chinese digital currency starting to compete with the dollar. Especially if this new Chinese currency is not restricted by international borders and its digital nature means it could eventually be used by anyone, anywhere, anytime. This is particularly true in markets where the US dollar is used as an informal substitute for unstable local currency, or ‘grey’ areas of the world economy, or in sanctioned countries. In places with close ties to China or countries where China is invested heavily, an internationally accessible digital Renminbi could become the preferred currency of choice. Even if the Chinese government can ‘see’ everything going on, this may not stop people outside of China’s borders using it, if they believe this is preferable to using the US payment and banking networks. Ultimately, if the current US political leaders see Chinese digital currency as something that threatens the dollar’s position as the global currency of choice, then you can be sure there will be a strong reaction and I’m willing to bet it will be in the form of a US Treasury-backed “Digital Dollar”.
The Crypto Response
What role would existing cryptocurrencies like bitcoin play in a future world that’s characterised by sovereign digital currencies? Well, every action has a reaction and one possible reaction to more state centralisation, control and surveillance (strengthened by the issuance of sovereign digital currency) could be that increasing numbers of people choose to ‘opt out’ and seek alternative financial systems which are more decentralised, borderless and outside the control of any single entity. In addition, as we move towards a cashless society, those who prefer the privacy and physical security of cash may shift to using decentralized cryptocurrencies that offer the same benefits. Finally, people who hold gold as a ‘hard asset’ hedge against macroeconomic instability and fiat currency devaluations may see digital currencies like bitcoin or digital gold as a viable, alternative store of value.
No matter how this all plays out or what country (or company) takes the leap first, you can be sure that the future of money is going to be digital. One way to prepare for this future is to learn about existing crypto assets and blockchain technology, buy some and try them for yourself. I encourage you to open up a digital wallet and experiment with using digital assets right now. It doesn’t require a huge investment, just a few dollars worth will give you insight into this new world and provide a flavour of what’s to come.
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