The biggest news of 2019: the digital yuan

The biggest announcement of 2019? The most important news of the 2019 year is
certainly the ongoing appearance of the first digital currency backed by a government. We all know this quote from Voltaire, “Paper
money eventually returns to its intrinsic value – zero”. And the digital fiat currencies, that will
appear in the medium-term but progressively, will not escape to this somewhat prophetic
announcement. Whatever, China is poised to launch the first
government-backed digital currency. Indeed, the national cryptography law, established
in October 2019, makes government responsible for setting encryption standards covering
both the state and industries. The law grants the Chinese government authority
over it. The People’s Bank of China plans a digital
yuan, anticipating that it will decrease the workload at financial institutions. Between you and me, without neglecting the
role of the Trump fueled trade-war in the acceleration of this project, it might allow
the Chinese yuan to compete against the hegemony of the dollar over the longer term. A Bitcoin, a stable coin or something else? A blockchain-based fiat currency !
Remember that it is far bigger than the readying of its own Bitcoin, despite the fact that
it will be also a tokenized money. On contrary to the speculation feature embedded
in Bitcoin, the Libra from Facebook should have become a store of purchasing power, had
governments across the world accepted the idea that the money creation process could
also be a private process with it transferring the taxation power through inflation from
them to private companies, an unacceptable idea for their agenda. The digital yuan will be closer to a stable
coin, namely a store of value for purchasing power. Rather than a Ponzi-scheme crypto currency,
like the Bitcoin. It will be fully backed by the central bank
of the world’s second-largest economy, namely the PBOC, drawing its value from the Chinese
State’s ability to impose taxes in perpetuity. Here again we are at the heart, the power
of taxation ! Here lies the most important fact, namely
that it is indeed a fiat currency, only the distribution process as well as the form are
disrupted. Bottom, line it will be a digital fiat currency
allowing stronger flexibility in taxation and in setting deep negative interest rates,
namely beyond the floorish level that we are currently experiencing in Europe for instance. We can bet that soon, other national authorities
are bound to embrace this powerful idea. It is the perfect way for central bankers
to control the inflation rate, as depressionnary pressures are more difficult to deal with
than inflationary ones, especially when central banks are out of ammunition. See the unconventional monetary policies’
experiences over the last decade in Western economies. And name a cat a cat: last end of the year
intervention of the Fed in the money market is nothing less than a Quantitative Easing
(QE). If the global economy gets mired in long-term
stagnation, fiat digital currencies will at least be an efficient way of monetary easing
without involving banks. A strategic process, an internet-like top
priority? Little is known about the digital yuan except
that it’s been in the works for five years and Beijing is nearly ready to launch it. It should allow the People’s Bank of China
to control of who gets to buy or sell the digital currency. To begin with, the currency will be supplied
via the banking system and replace some part of physical cash. But what goes beyond this step will matter
much more for long-term investors: it can disrupt both traditional banking and the post-Bretton
Woods system of floating exchange rates that the world has lived with since 1973. No wonder why its development is a top priority
for the Chinese government as it put it on the same scale of priority for national interests
than the development of Internet. Indeed, if blockchain technology shows promise
in handling a large number of transactions simultaneously, then digital currencies could
become substitutes not just for physical cash but also for bank reserves according to Bloomberg. On top of that, a fiat digital currency could
bypass this system and allow any holder of the currency to have a deposit at the central
bank, potentially making the state the monopoly supplier of money to retail customers. But if the central bank becomes everybody’s
deposit-taker, it may find itself becoming everybody’s lender too. And with this the notion of privacy somewhat
vanish: the government with its monopoly on money creation enters a dangerous game with
authoritarian features: easier to discriminate people; easy to cross the lines of total control:
authorities would be able to monitor who spend on what, as anonymity disappears when cash
does; redirect consumption where it plans; or even confiscate wealth in case of political
activism that bother the head of the gorgon. What goals behind? PBOC’s vice-governor, Fan Yifei sees reduced
operating costs, increased efficiency and a broad range of new applications as the many
outcomes of moving from a paper-based currency to its digital form. Of course, the PBOC’s official line is that
it believes a blockchain-based digital currency would allow it to make more accurate monetary
policy decisions by improving its ability to gather data on financial flows… But, as with all policies in China, maintaining
social control and enforcing laws is the No. 1 priority here. People’s Bank of China Governor, Zhou Xiaochuan,
has said it will take China approximately 10 years to fully embrace the digital renminbi,
though he said later that there is no official timeline. Competition ahead? The PBOC isn’t the only central bank that’s
exploring the feasibility of its own digital currency. The Bank of England joined with researchers
at University College in London to create RSCoin, a digital currency for central banks. The Bank of Canada has also said it is developing
a blockchain-based digital version of the Canadian dollar. Central banks in Russia and Australia have
also expressed interest in exploring digital currencies.

1 thought on “The biggest news of 2019: the digital yuan

  1. Please go on and register your email. You will receive my master thesis about Deutsche Bank and the European banking system. Few has change since 2013 when I wrote it. Only things that changed was that at that time I took a risky bet but I proved to be spot on.

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