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Mind Of Mav

The Digital Currency War

Over 90 percent of people in China’s largest cities use electronic payment as their primary payment method.


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For years, commercial banks have lended money to individuals and businesses, enabling them to make and receive payments digitally without exchanging cash. Over the past decade, electronic forms of payment and mobile banking have become increasingly available, safe, and cost effective due to technological advances in data processing. From 2013 to 2018, global cash transactions fell from 89 percent to 77 percent. Credit cards too have fallen out of favor, since they require businesses to have processing infrastructure and charge high fees for customer transactions. As of 2018 in North America, over 450 electronic transactions were made per capita per year. In China, over the past few years, cash use has become so obsolete that street beggars use printed QR codes to receive change. More recently, mobile banking and the trading of digital currency — like Bitcoin — has gained popularity. Unlike mobile banking apps or third-party payment processing platforms like Venmo, digital currency is a type of currency that is solely traded online.

Digital currency exists in two forms: centralized and decentralized currency. Most of the digital currency we hear about today is decentralized, virtual currency. Virtual currency is not issued by the state and lacks the legal tender status declared by the government; instead, it is under the control of the currency developer or the founding corporation. Virtual currency is more volatile due to the absence of institutional capital backing the currency. The most popular type of virtual currency, cryptocurrency, verifies transactions through cryptography then records transactions on a publicly distributed ledger called a blockchain. Some governments see virtual currencies like Bitcoin and Facebook’s Libra stablecoin as a threat to their capital control since widespread adoption of these currencies could reduce national monetary sovereignty.

To remedy this issue, a government could issue digital currency or Central Bank Digital Currency (CBDC) directly to the public that could be used as legal tender in the same way cash is today. A central bank digital currency would be implemented using a database with a record of the amount of money held by every customer, making the use of a blockchain unnecessary. While CBDC generally exists in conceptual form, nations including China, Sweden, Uruguay and Norway have considered launching a digital version of their native fiat. A country with a national digital currency would reduce public reliance on commercial banks and increase accessibility to those excluded from the financial system (for more on digital currency accessibility, see Katie’s article). While shifting to a centrally-backed system would allow the government to better monitor the economy, it would also grant the country stronger financial positioning within the global market as the first world power to dominate the digital currency market.


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While the West outlined key requirements for central bank digital currency this year, the People’s Bank of China has already started testing the digital yuan in four major cities. Several central banks in the West have posed central bank digital currency regulations as follows: centralized digital currency must be accessible and low cost, resilient, available at all hours and secure enough for the general public. Contrary to China’s plan, these central banks insist that the payment system must involve the private sector in order to benefit from innovation and competition. About a year ago, Jerome Powell, Head of the US Federal Reserve, suggested that the need for CBDC in countries other than the United States might be more compelling since the use of cash in the U.S is robust. As China continues to work on its digital currency, a growing number of leaders in the United States are calling for the issuance of a central bank digital currency to better monitor the flow of money and illegal activity. While the United States is on board with a central digital currency, the timeline is likely ten to fifteen years in the future.

The digital yuan could help challenge the dominance of the U.S. dollar. As of April this year, China’s New Digital Currency Research Institute began internal tests of digital currency, electronic payment (DCEP) in which select workers in Shenzhen, Suzhou, Xiong’an New Area and Chengdu receive fifty percent of their transportation subsidy in digital yuan. Last week, the Shenzhen government in China held a lottery in which a total of 10 million yuan (about $1.5 million) worth of the digital currency was given away. Out of two million applicants, 50,000 citizens won DCEP. Lottery winners can use a digital app to receive digital yuan and spend it at thousands of participating merchants in certain Shenzhen districts, most of which are home to tech corporations like Tencent. While the intention of DCEP is to replace more and more of the economy’s circulating cash, the introduction of DCEP at this testing level is unlikely to trigger inflation and will not be issued on a large scale anytime soon. For now, the pilot is being launched on a trial basis, in part to prepare for the 2022 Winter Olympics in Beijing. Before that time, issues like access to digital services, privacy, offline use and possible discrimination against underbanked and underserved regions (for more on underbanked regions, see Katie’s article) should be addressed before national adoption of any type of digital currency.

While China’s DCEP, digital yuan is a financial infrastructure upgrade, it might not feel like it for over 90 percent of citizens in China’s largest cities who pay for goods and services using private online payment platforms like AliPay and WeChat. Much like many other private processing apps, Chinese citizens will soon be able to link an account from one of China’s state owned banks to create a DCEP wallet in a mobile app. While issues with privacy and payment apps seem to dominate western conversation, Chinese citizens seem to understand and accept that digital payment systems track their data and aren’t nearly as concerned as Westerners about individual privacy. While digital tracing offers a profound loss of user privacy compared to cash and credit cards, many Chinese citizens view DCEP as just another method of digital payment.


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Mobile payment transaction volume in China has steadily increased each year

China’s push for a cashless society is becoming reality. Since late 2016, China’s New Digital Currency Research Institute has been working towards creating the world’s first centralized digital currency. Digitization of a national currency will remove private infrastructure and transaction costs for individuals and businesses using the centralized payment system, giving the government more control over money in circulation. With digital currency, electronic payment (DCEP), economies of scale will be better equipped to predict economic fluctuations and the effectiveness of monetary policy. Though centralized currency as a whole can help any government keep tabs on the masses, Western nations might have a tough time pitching central digital currency to citizens who seem to value data protection and personal privacy over convenience.

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