China announced the launch of a government-created digital currency, WSJ reports.
Why It Matters: “Cryptocurrencies such as bitcoin have foreshadowed a potential digital future for money, though they exist outside the traditional global financial system and aren’t legal tender like cash issued by governments.”
- The digital yuan is regulated and issued by China’s central bank. It will likely give the government “vast new tools to monitor both its economy and its people.”
- However, Bitcoin had an appeal of anonymity, which has been abandoned in the case of digital yuans.
What It Looks Like: A user can pull up a digital yuan on their phone, or on a card, and spending it doesn’t require access to the internet. It “appears on a screen with a representation of Mao Zedong, looking just like the paper money.”
A Global Purpose: Since it’s not tethered to the global financial system, China is setting up its digital currency for worldwide use. Whereas the “U.S. dollar has been king since World War II,” China’s early adoption of digitization could give it a heads up to gain more centralized control and grab a piece of the unclaimed technologies of the future.
- It’s possible the new financial tool could gain a foothold on the margins of international finance, providing options for those in poor countries to transfer money worldwide.
- Limited international usage could “soften the bite of U.S. sanctions, which increasingly are used against Chinese companies or individuals.”
The Bottom Line: Remember how Amazon changed retailing and Uber disrupted the taxi system? Well, digital money could have an equal if not bigger effect. China, an authoritarian state and U.S. rival, leading the pack on digital currency is “propelling what was once a wonky topic for cryptocurrency theorists into a point of anxiety in Washington.”
- Digital currency looks like “a potential macroeconomic dream tool for the issuing government, usable to track people’s spending in real time, speed relief to disaster victims or flag criminal activity.”
- However, China “stands to gain vast new powers to tighten President Xi Jinping’s authoritarian rule.”
We have already heard of plans for digital currencies from most major central banks, including the Fed. In fact, the Boston Fed and MIT researchers may come out with prototypes as early as July 2021.
The impact of a digital dollar could actually be astoundingly huge. By having a digital US Dollar, we could have digital wallets and send each other digital dollars instead of going through an intermediary like Cash App, Venmo, or PayPal.
It also reduces the attractiveness of keeping cash at a bank, where it isn’t fully accessible. Why keep all your money at a bank if you can store a good amount of cash in your secure digital wallet? Why would you send a wire or transfer money with a huge fee when digital dollars can be sent instantly and cheaply, without a middleman?
It might even affect the FinTech services like Stripe, as they are a transaction middleman that takes ~3%, although I believe they also provide a lot of value other than the transfer itself.
The knock-on effects for financial technology companies and banks are huge and should not be underestimated.