Recent credible reports indicate that China is planning to launch its own digital currency within the next 6 to 12 months. Edith Cheung, a partner at Proof of Capital, made this prediction to CNBC on November 20 and expressed strong confidence in its timing.
China has been developing a digital version of the yuan for at least a year, although—as is common when discussing Chinese policy—government officials have not publicly commented on the matter.
Last month Chinese President Xi Jinping said he wants the country to increase its work on blockchain technology. That statement initially prompted many people to buy bitcoin, but subsequent comments clarifying the government’s disinterest in cryptocurrencies pushed BTC back to previous price levels.
This development could make China the first major country to adopt a national digital currency. Some predictions claim the digital yuan could be launched within the next three months, but many such rumors lack authoritative evidence.
The race for a national digital currency
If China successfully issues a digital currency, it could gain a competitive advantage over the United States. Currently the U.S. lags behind partly because of skeptical policy positions toward cryptocurrencies.
A cashless society has long been an objective for many nations. It simplifies the monitoring of consumer spending and can make tax avoidance more difficult.
Related to this, on November 19 Federal Reserve Chair Jerome Powell released a letter addressing digital currencies and their role in the U.S. His main point was that the Fed continues to study the costs and benefits of developing a digital U.S. dollar and has not yet reached a decision.
The dollar stands to lose more from digitalization because it remains the primary currency for international trade. Any other country—or private entity, as was discussed in the case of Libra—that successfully develops a robust digital solution could gain leverage over the U.S. Since much of the U.S. trade deficit is funded by issuing more dollars while demand remains high, a competing digital currency could shift global dynamics.
Implications of these developments
At a more granular level, the effects on monetary and financial stability of a country adopting a national digital currency are still unclear. Monetary and fiscal policy have centuries of institutional history, and a sudden shift could disturb established balances.
Another important question is whether holding a digital currency would earn interest as bank deposits sometimes do today. These and other technical, legal, and economic issues must be resolved before introducing a digital currency into the financial system.
Cryptocurrency advocates may argue that a national digital currency would reduce privacy and enable greater censorship compared with decentralized cryptocurrencies. If a digital U.S. dollar were created, the Fed could potentially trace and record transactions made in the new form of currency. This is one reason why bitcoin supporters and other crypto proponents are likely to oppose the emergence of national digital currencies.