Digital Yuan will dent the Dollar

ByDr.Faisal Ahmed

Authors: Dr. Faisal Ahmed and Hardik Gupta*

The global financial architecture has taken a leap with China testing its digital currency for the first time ever. It is known as the ‘digital yuan’ and was tested across the cities of Shenzhen, Chengdu, Suzhou and Xiong’an. In fact, the research and development process for the same was underway for at least five years. Chinese President Xi Jinping has already stressed on the need to develop artificial intelligence and 5G technologies at a large scale and has referred to them as the ‘new infrastructure’. The digital yuan, too, is a novel financial infrastructure in itself – a truly innovative mechanism. It has immense geopolitical implications for China and the world, the most important being its ability to avoid any sanction imposed by the United States.

A digital currency is different from cashless payments like those carried out through credit cards or apps. In such a transaction, the settlement is realised immediately, as against the cashless ones wherein banks still have an intermediating role. The digital currency creates avenues for communication between devices through which they can sense and exchange information and payments, and removes the conventional dependence on banks. From stimulus package to disbursement of development aid, and from direct money transfers to infrastructural investments like those meant for the Belt and Road Initiative (BRI), China can use the digital yuan in multifarious activities. This is deemed to strengthen its global competitiveness and enhance its position of strength in global negotiations too.

Within China, a high acceptance of this digital currency is expected. This can be attributed to the country’s excellent mobile phone penetration and a good record of financial inclusion. These factors coupled with a state-administered system – that the digital yuan is – will support the grassroots outreach of the digital currency ecosystem. The local population is already accustomed to using apps like Alipay and Wechat Pay, and is likely to embrace this digital currency without much hesitation. In fact, the introduction of digital yuan will have huge implications for the economy and the people as it helps reduce costs and increase convenience in making payments. Moreover, the People’s Bank of China, China’s Central Bank will be in a better position to control illicit payments and frauds. The digital yuan has direct benefits for public policy interventions too. It would help the government directly transfer any relief fund or stimulus package to overcome the adverse effect of Covid-19 on supply chains and livelihoods. Besides, the Chinese government also intends to transfer the salaries of government employees through the digital yuan.

Today, the United States dollar is a robust currency with utmost acceptability in terms of international transactions accounting for more than 90 per cent of the forex transactions. Such an acceptability and trust endows the United States with better negotiating position in the global financial markets. The United States, however, has often used its ability to apply economic sanctions to gain geopolitical advantages. For instance, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) infrastructure requires all dollar transactions globally to be routed through the United States thus giving it a de facto ability to unilaterally freeze transactions. However, there have been calls in Europe for developing an alternative to the SWIFT payment system too……more here

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