The projected US-China decoupling has started displaying its effects on the business world. Industries like pharmaceuticals, semiconductors, and rare earths have been receiving criticism for implementing re-shoring practices.
However, another decoupling is soon going to be making its way in the financial world. The fact that China is extensively working towards the development of a digital currency signals major changes in the global technologies used for making digital payments. It also hints towards the increasing techno-nationalism around the globe. Probably, this is the reason for rapid emergence of central bank digital currencies (CBDCs). The one that is under-development in China is known as e-CNY, or e-yuan.
Some of you might be wondering whether these CBDCs would be useful or reliable. The answer is “yes”. Even though these are digital currencies, they cannot be equated to cryptocurrency. Reason being cryptocurrencies are decentralized. They are created and owned by individuals or private bodies; sometimes even as a joke, e.g. the Dogecoin. Central bank digital currencies, on the other hand, are backed by the state. They are as good as the national currency, just a digital version of it.
Benefits of CBDCs
Widespread use of CBDCs can have multiple socio-economic benefits for a nation. Many citizens of a country do not have a bank account. Therefore, they are excluded from data that forms the basis for various calculations aimed towards planning and improving economic growth. Availability of a digital currency would mean that smartphone users from poverty-stricken areas of the world would also be able to participate in the country’s economy.
The fact that these central bank digital currencies are controlled and monitored by the state significantly reduces the chances of them being used in illegal financial activities such as terrorism or money laundering. Also, it prevents a situation where excessive power may end up lying with private actors. Maybe that is the reason why 86% of the central banks across the world are currently undergoing trial-and-error with respect to the development and use of CBDCs. This figure was revealed in the results of an analysis conducted by the Bank for International Settlements (BIS), and is hence not exaggerated.
The link between CBDCs and Geopolitics
In the current political environment where decoupling has already disturbed the supply chains, CBDCs will result in the formation of global financial blocs. Below is a detailed explanation of factors that make such an occurrence seem unavoidable.
In order to eliminate the effect of US sanctions, Beijing is striving to limit the use of dollars. Consequently, the US dollar saw a sharp decline in its value this year. It fell below 60% of
the overall world reserve currency holdings. On the other hand, Beijing is trying to popularize the yuan internationally by promoting its use as a transactional currency across the Belt and Road Initiative (BRI). However, it is a fact that the USD is still the world’s most dominant reserve and widely accepted currency.
Therefore, it is no surprise why Beijing is striving to develop an equivalent system in terms of banking. In fact, all the tech giants in China have received instructions from the government to work alongside People’s Bank of China, China’s Digital Currency Research Institute, and other state-owned institutions who might be a part of this project for a speedy development of the digital currency.
The prevailing situation has complicated matters for international firms and investors who are doing business in China. Their ties with China might as well put them under Washington’s strict scrutiny.
Also, there is a possibility of sanctions being imposed on multinationals that might be linked to China’s CBDC development in any manner. If this happens, decoupling would definitely be inevitable. Unfortunately, the consequences of such a rift will not only be limited to China and the US, but also spread to fintechs and investors across the globe.