China's new DCEP could pose serious threat to the USD

While the world was busy fighting the pandemic and a collapsing economy in April, China unveiled a pilot run of its Central Bank Digital Currency (CBDC) named “Digital Currency Electronic Payment” (DCEP) - a digital form of Yuan that has been under development for the last six years.[1]

The concept behind DCEP is for it to circulate it as an alternative to “cash,” or in the economics term- M0.[2] The Central Bank’s Digital Currency is issued by the People’s Bank of China (PBOC), and is backed by the Yuan currency. The program was launched on a small scale, as a pilot test in April, with the currency rollout being limited to the cities of Shenzhen, Suzhou, and Chengdu. The pilot has also been extended to Xiong’an — a “smart city” under development located south-west of Beijing. Reports from a few local media houses also claim that part of the digital money was distributed in as transport subsidies in Suzhou, to bring the digital currency into circulation.[3]

Even though the DCEP is built on the blockchain and cryptography technology, it is not the same as the cryptocurrencies in circulation. In fact, if anything, it is anti-cryptocurrency, since it follows a centralized model, instead of the cool ‘decentralized’ model. A centralized model gives DCEP the potential to help the government against tax evasion, money laundering, and terror financing. This will directly impact the revenues for government, while improving financial compliance and national security.[4] The PBOC is also looking to include further programming so it could regulate the flow of money. For instance, if an amount is issued to a local commercial bank for lending on to small businesses, a tracking system could ensure that the money is activated only once the small firm receives it.[5]

Following China’s research and a growing interest for CBDC’s around the world, the World Economic Forum published a toolkit for policymakers in January. This toolkit helps the policymakers by providing them with a detailed framework for easy deployment. It covers the costs, benefits, and risks involved, while also providing alternative solutions if the project is not feasible.[6]

Currently, almost 50% of all international transactions are conducted in Dollars, making USD the lead currency.[7] The DCEP, however, is also looking to make its place as a currency option in the international market. According to a report by JPMorgan Chase & Co, China’s CBDC holds great potential to make a dent on the US Dollar’s current standing as the lead for the world’s reserve currency.[8] Countries such as Venezuela which are virtually cut off from the global economy because of the US sanctions have even started considering DCEP as an alternative to the Dollar. Since oil is quoted only in USD across the world, China’s CBDC is looking to be the alternative, potentially starting an international currency war. In fact, recent reports by South China Morning Post states that Venezuela has been considering paying Chinese oil suppliers in RMB through Yuan accounts in China.[9]

China has also used its influence and investment in South & South-east Asia to regulate the circulation of RMB. In Hong Kong, the RMB is now the largest exchange currency, following the local Hongkong Dollar. Nepal, Cambodia, Mangolia, and South Korea allow the official circulation of RMB. In Taiwan and Vietnam, RMB can easily be exchanged through both unofficial and official banking channels. Over the past few years, Sri Lanka and Bangladesh have also become economically dependent on China. [10] China’s influence is not limited to South & South-east Asia, but also across other parts of the globe. It pledged a $60 billion unconditional aid in 2018 to Africa, strengthening their diplomatic ties.[11] It seems that through a little persuasion and other financial incentives, China can likely convince other countries to opt for DCEP over the USD for bilateral trade settlements with the country.

China’s early research and implementation plans for a CBDC has put it in a highly strategic advantage as compared to the rest of the world. It is not at an advantage to both- setting the international standards for digital currency and creating a beneficial model for the other countries to follow. Following the promise shown by DCEP around the globe, experts have been strongly advising the U.S. to issue a “Digital Dollar”.[12] Even though some experts believe that the Digital Dollar could be 10 to 15 years away[13], I believe that the timeline may have considerably moved up, especially with China launching its DCEP pilot. In order for USD to remain as the preferred currency for transactions around the world, US President Trump, and his government will have to speed up the digitization of the entire country’s financial system.

Do you think that the US will respond quickly to this threat hovering above them, while they still continue to deal with a pandemic?

[1]https://www.forbes.com/sites/zennonkapron/2020/05/24/chinas-central-bank-digital-currency-will-strengthen-alipay-and-wechat-pay-not-replace-them/

[2]https://forkast.news/china-cbdc-dcep-central-bank-digital-currency-yuan-zhiguo-he/

[3]https://www.bloomberg.com/news/articles/2020-06-01/china-is-making-cryptocurrency-to-challenge-bitcoin-and-dollar

[4]https://www.thehindu.com/opinion/op-ed/notes-on-a-digital-currency-plan-made-in-china/article31653605.ece

[5]https://www.economist.com/finance-and-economics/2020/04/23/china-aims-to-launch-the-worlds-first-official-digital-currency

[6]https://www.weforum.org/whitepapers/central-bank-digital-currency-policy-maker-toolkit

[7]https://www.swift.com/node/19186

[8]https://www.chinabankingnews.com/2020/05/23/central-bank-digital-currency-poses-a-threat-to-us-dollar-hegemony-jpmorgan/

[9]https://coinrivet.com/pt/what-plans-does-china-have-for-its-cbdc/

[10]https://carnegieindia.org/2020/06/04/china-s-central-bank-unveils-digital-currency-in-challenge-to-u.s.-dollar-pub-81969

[11]https://www.washingtonpost.com/world/china-pledges-60-billion-in-aid-and-loans-to-africa-no-strings-attached/2018/09/03/a446af2a-af88-11e8-a810-4d6b627c3d5d_story.html

[12]https://www.cnbc.com/2020/01/23/davos-calls-for-a-us-digital-dollar-as-china-works-on-digital-yuan.html

[13]https://www.cnbc.com/2020/01/23/davos-calls-for-a-us-digital-dollar-as-china-works-on-digital-yuan.html