The advantages of instantaneous, anonymous, and unlimited numbers of transactions from anywhere in the world that digital currencies make possible are, without doubt, potentially world-changing.
But central banks haven’t shared that enthusiasm, nor have police states such as China. In fact, banking authorities around the world have delayed, denied, or debunked any plans to add “cryptos,” and for a variety of very rational reasons.
Cash to Burn
As virtual cash that leverages distributed ledger technology (DLT), also known as blockchain technology, cryptocurrencies allow for anonymous transactions to occur exclusively over the internet on a global scale. With enough acceptance around the world, digital currency users would have little use for conventional currencies. They wouldn’t be paying taxes on their anonymous earnings, either.But with the rising COVID-19 outbreak in China, all that may be about to change.
A Closed Blockchain
Transitioning to digital currency, however, could eliminate cash as a vector of transmitting the disease from one person to another. But the coronavirus outbreak is actually not the original reason for China preparing to issue its own digital currency. Rather, it’s Beijing’s need to control capital movements in and out of China. That includes significant levels of illegal cash flows, often enabled by new digital payment technologies, which have driven China to create its own digital currency with “Chinese characteristics.”When issued, DCEP, would be different than current digital currencies in a number of ways. It would leverage blockchain technology, but the blockchain wouldn’t be distributed across the internet, just within China’s closed internet, behind the great firewall. This would likely eliminate lag time that comes from external validation, making it efficient and insulated from foreign influence.
Total Control or Total Disaster?
That will enable the Chinese Communist Party (CCP) leadership to have complete oversight over its capital and all transactions.What would China’s economy look like if it transitioned to a digital yuan? It may not be the solution that Beijing hopes it would be.
It would certainly trigger a bigger stampede than there already is for folks to get their money out of China. That, in itself, could be the last straw.
It would certainly dampen the incentive and ability to build private wealth in China. What would stop the Party from appropriating any successful business from its owners? That already happens today; complete financial transparency would enable the Party to steal more efficiently.
It could also discourage direct foreign investment. How many Western businesses want every transaction scrutinized by Party officials more than they already are? How much in added costs would have to be added to grease the skids every year? That’s one of the reasons Western firms have been leaving China over the past several years.
Every Option on the Table?
All that said, my own personal speculation is that what may evolve are two distinct digital monetary systems—one for the masses, the other for the Party. That remains to be seen.What is known is that China dedicated years to develop its own digital currency prior to the deadly outbreak it’s now fighting. Will this terrible event push China to pulling the trigger on the digital yuan?
That may well be. Given the severity of the outbreak, one would assume that most options are on the table.