China’s digital yuan is expected to launch in the near future, with some industry professionals predicting it will be introduced as early as 2021. In addition to higher economic efficiency and lower costs, China is planning to use the digital yuan as an oversight tool, hoping to reduce capital outflows during China & U.S. trade wars. 

China Digital Currency 

The Digital Yuan has been a work in progress for the last 5+ years, with the ultimate goal of going completely cashless. Many believe that China’s digital currency is approaching completion, and could be introduced as early as 2021. This is a major milestone for China, as it could be the first major economy to launch a central bank digital currency. In Xiong’an, China already has numerous businesses engaging in trial runs with the proposed digital currency. It’s worth noting that some of the largest companies like McDonald’s, Subway, and Starbucks are all involved in the trials. Unlike major cryptocurrencies like Bitcoin, and Ethereum, China’s digital currency will be fully centralized. This means that the People’s Bank of China will have full control over the protocol, with the ability to monitor all transactions in real time. With the centralized infrastructure in play, China plans to use it to its advantage in an attempt to reduce capital outflows during China & U.S. trade wars.

Tracking Big Cash Transactions 

According to reports, China will start to monitor large-sum cash transactions in July, with the hopes of reducing capital outflows during continued U.S. trade wars. During geopolitical conflicts with the U.S. , capital outflows continue to weaken its dollar holdings. China plans to leverage the digital Yuan in financial oversight, meaning it will help the government monitor cash transactions. It’s believed that banks in the Hebei Province will collect serial numbers for individual cash transactions of 100,000 yuan ( $14,100) or more. In doing so, all of the data will be collected and shared with the People’s Bank of China. When the central bank eventually rolls out a central bank digital currency, the centralized structure will be well equipped to track user transactions like never before.

For China, the problem with capital outflows is that they result in disposal of the yuan. When the yuan is disposed of, Chinese currency weakens, which ultimately reduces foreign currency reserves. The upcoming oversight will apply to in-person transactions, in addition to ATM deposits & withdrawals. It’s believed that higher amounts of transactions will start to be “flagged” since banks will adopt a much more rigorous review process. With the U.S. dollar being a “reserve currency,” China needs to prevent individuals from converting the yuan into U.S. dollars.

China Preparing For The Worst 

During escalating geopolitical risks, China is positioning itself to increase government influence. The digital yuan will give China the ability to survive in the event that the U.S. cuts China off from the U.S. dollar payment system. For years now, China has been working on a digital currency that could help them navigate possible sanctions. In a recent report, Fang Xinghai, vice-chairman of China Securities Regulatory Commission stated that:

“Such things have already happened to many Russian businesses and financial institutions. We have to make preparations early – real preparations, not just psychological preparations.”

With the country getting extremely close to being the first major economy to launch a central bank digital currency, the United States is starting to become quite fearful. Aside from a digital yuan potentially weakening the dollar, experts fear that it could help countries avoid U.S sanctions, and also become a national security concern. In doing so, the U.S. believes that a digital yuan could shift the balance of global financial power away from the reserve dollar. During a crisis simulation by Harvard, it was believed that a digital yuan could bypass the global financial system and be used to fund an attack on U.S. soil, initiated by North Korea nuclear warheads.

Obvious Problem With the Digital Yuan 

Despite the potential benefits of a CBDC for China, we also have to remember that it will be fully centralized. With China having complete control over the CBDC, there are major privacy concerns involved. When we look at personal data, the most sensitive data resides in financial transactions. A centralized digital currency controlled by China supply’s their government personal data that is extremely sensitive, as well as direct surveillance. It will be interesting to see how China gets everybody to “buy into” this new financial landscape. Despite the fact that a digital yuan could be quite lucrative for China, it also imposes privacy concerns that the government will have to address to gain any sort of traction.

Image Source: Pixabay 

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