Revolution in November
The views of the Authors are not necessarily the views of Enigmose.
There are many qualified candidates for the title of second most consequential event of 2020, right after coronavirus and its associated worldwide economic implosion.
The global reach of the George Floyd protests comes to mind, as does the still-unfolding China–India clash in the Himalayas. Perhaps North Korea or Iran will deliver another crisis unto the world. Possibly more deserving than any of these, however, is China’s planned rollout of its digital yuan, through which the Communist Party intends to upend the U.S.-led financial world order.
China has been conducting intensive research on a potential centralized digital currency since at least 2014. The Digital Currency Electronic Payment (DCEP) plan, popularly known as the digital renminbi or digital yuan, was announced by the People’s Bank of China (PBOC) in October 2019. In an op-ed published in the Global Times, a Communist Party mouthpiece, leading Chinese academic Huang Zhen declared that the digital yuan will “likely” become the “world’s first sovereign digital currency,” before spending the rest of the article attacking Facebook’s rival digital currency project, Libra (more on that later).
While the PBOC has yet to fully commit to a timeline for rolling out the digital yuan, its efforts appear to be well under way. Pilot trials have been conducted in several cities so far this year, and officials have indicated that the currency will be ready for use by visitors to China during the 2022 Winter Olympics in Beijing.
China aims for economic omniscience
The digital yuan can be broadly classified as a central bank cryptocurrency, a subcategory of digital currency. The central bank aspect is self-explanatory: the currency would be controlled exclusively by the PBOC, China’s central bank. The digital yuan’s most radical departure from the norm would be the use of cryptography to verify and secure currency ownership and transaction. This added layer of security means that the currency will be recognized as legal tender and exchangeable between individuals without requiring a bank as an intermediary.
Terms like “cryptocurrency” may evoke more familiar currencies like Bitcoin, and indeed the (in)famous digital asset shares one of its defining features — strong cryptography — with the digital yuan. In other respects, however, the two currencies could not be more different. Bitcoin originated, and is based on, peer-to-peer technology called blockchain. Every transaction made in bitcoin has its verification “distributed,” meaning Bitcoin’s entire history is shared and synchronized between the millions of users in its network through various consensus mechanisms. Because Bitcoin’s network is so vast, it is practically impossible for any single user to accrue enough computational power to take control of the ledger. This places Bitcoin beyond the command and oversight of any central authority, resulting in it becoming the near-universal currency of online black markets in recent years.
The digital yuan, by contrast, is not distributed: it is entirely within the jurisdiction of the PBOC. In contrast to Bitcoin, whose mission statement explicitly revolves around decentralization and dispersal of power away from government bodies, the digital yuan represents a vision of hyper-centralization that traditional cash is unable to achieve. If China is indeed planning to transition to a digital-only economy, the Communist Party would be able to achieve nothing short of economic omniscience: every cash reserve, transaction, and account would exist only with the knowledge and consent of the government.
This has, on its face, some benefits. It would hamstring unethical commerce and deter the bribes and tax evasion that characterize China’s notoriously corrupt economy. Anyone who knows Xi Jinping’s government, however, knows that the last thing it needs is yet another method through which to enact high-tech authoritarianism. The digital yuan would put the financial lives of every Chinese citizen in the palm of the PBOC’s hand. Dissidents could be tracked and instantly bankrupted. Billionaires could be made even more pliable to the whims of Beijing than they already are.
But as much as the Chinese government cares about maintaining control at home, its primary goal is spreading financial influence abroad. Its ultimate objective is to topple the dollar domination that has kept the U.S. at the top of the global financial pecking order for several decades. This process begins with introducing renminbi as an alternative international currency starting with China’s partners in the global south. For this purpose, the digital yuan serves as an ideal catalyst.
Forcing Washington’s hand
Being state-guaranteed (rather than backed by private banks like all online deposits at the moment), secure, scalable, and relatively frictionless, central bank digital currencies have the potential to outcompete traditional currencies in the development of cross-border monetary systems.
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