How China’s digital currency is leading the race to displace bitcoin and other cryptocurrencies
Ever since 2014, the Chinese government has led the global race to form a central bank digital currency (CBDC) with the creation of the digital yuan. Central banks across the world soon began to play catch-up and develop their own projects behind this digital technology.
Seven years later, the Bank for International Settlements (BIS) estimates that 86 per cent of central banks around the world are researching digital currencies. About 60 per cent of them are developing their own digital currency, and 14 per cent have already begun deploying pilot projects.
The most advanced projects have been in the retail sector, especially in developing countries, as financial inclusion programmes are created to bring more people into the banking system. According to the PwC CBDC Index Report, the Bahamas and Cambodia have the most advanced projects for retailing central bank digital currencies and are ready to launch their digital currencies for mass retail adoption.
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CBDCs are centralised digital currencies backed by securities such as cash, gold or oil and regulated by national central banks. The aim is to provide safe “digital banknotes” for retail, corporate and daily use such as for payment of utility bills or purchasing products, peer-to-peer payments to others, interbank transactions and international financial settlement for wholesale clients.
According to the BIS, CBDCs are seen as a way for central banks to streamline key economic, financial and regulatory activities while safeguarding the public’s trust in money, maintaining stability and ensuring a resilient and safe payment system.
It will enable institutions to monitor bank wallets and transactions in real time, set currency thresholds and reduce the required balance in the account and create instant reporting on commercial banks.
Cryptocurrencies began to gain traction as a form of rebellion against financial institutions, which many people felt were no longer stable or trustworthy following the 2008 financial crisis. The original cryptocurrency, bitcoin, was intended to bring an easier and more secure way to transact money.
The key factors in play today in the cryptocurrency space are the governance of these assets, how they have been used and the impact they are having on society and the environment. Because of hacks, fraud and mismanagement of networks, some governments have growing concerns and are pushing for the creation of central bank digital currencies.
The People’s Bank of China has decided to introduce its project to bolster people’s confidence in its financial institutions and undermine the use of bitcoin and other cryptocurrencies. Beijing has long been an opponent of cryptocurrencies, especially bitcoin, for many reasons.
One concern is the negative impact cryptocurrency mining has on the environment and how it hampers the goals established by many countries, including China, to reach peak carbon emissions by 2030 and carbon neutrality in 2060. Therefore, many regulators are requesting a change.
Furthermore, we are beginning to see the cryptocurrency market lose one of its most competitive advantages in its concept of decentralisation and anonymity.
With the introduction of proof of stake ” which essentially provides mining power based on the number of tokens held by the miner ” as opposed to proof of work, where energy is used to mine the cryptocurrency, the identity of token holders is being compromised as the largest holder of tokens would need to hold most of the cryptocurrency itself. With the large market capitalisation of these assets, it would be almost impossible to remain anonymous.
Central bank digital currencies have an advantage over cryptocurrencies as they provide the same services but with the safety net of reliable governance. The privacy component still exists but would be controlled to respect the regulations and laws of the country.
China launched four pilot projects last year in different cities to test its digital currency and see how it would be accepted by the population. So far, about US$300 million worth of transactions have been made and it has been largely considered a success.
China’s accomplishments are pressuring the rest of the world to move forward on their own digital currencies. Beijing is aiming to reach as many people as possible through its commercial banks to further test the product and make the digital yuan officially tradeable by 2022, in time for the Beijing Winter Olympics.
The objective is to be the first digital currency traded internationally, thus making the renminbi the new global currency and another currency of choice for international trade.