The Yuan, a meek player in foreign-exchange transactions sits at 4% compared to 88% of the USD. The global favorability of the dollar has long plagued China’s desire to strengthen its currency competitively. Yet due to its volatility, a less-than-perfect track record of artificial currency manipulation, tripled with security concerns carries a heavy burden on holders. The yuan currency is at worst, unreliable, and at best, accessible in the context of monetary policy and foreign exchange. Here, China needed a new core competency in it’s currency. After significant reductions of cryptocurrencies in China, China doubled-down on its ability to centralize, monitor, and distribute currency that was both accessible and cheaper to transfer. China anticipated the “Bitcoin Boom”, and addressed it as a threat to the fabric of their economic and political influence. Monetary value of currency is inherently price-sensitive, and the new age of digitalization points to interest in digital forms of payment. Not surprisingly, after nearly 8 years of development, China introduced a currency that is digital, easily transferable and regulated, monitored, and cheaper for it’s holders: the digital yuan. The digital yuan attacks four transactional pillars: time, electronic payment middlemen, sanctions, and the dollar. Allowing the Chinese government to monitor spending real-time, accurately monitoring macro- and microeconomic trends: a truly top-tier economic tool for China.
As a result, many countries, more specifically the US, are transfixed on the possibility of a digital dollar in the future. Does the move make sense? Well, it depends on a multitude of factors. Treasury Secretary, Janet Yellen and Federal Reserve Chairman, Jerome Powell note that the rise of digital currency may address temporary currency niches, but shouldn’t affect the USD in the most immediate short-term citing, poorer countries using the cheaper digital Yuan alternative for transfers – many of which are already under generous Chinese economic influences. Yet, Powell states, “Anything that threatens the dollar is a national-security issue. This threatens the dollar over the long term”. National security is an umbrella-term for the repercussions of the novel digital yuan. Basically put – if your country is using a foreign currency in its home turf, something is terribly wrong.
China, as the digital currency “litmus test” of the world, shows promise through aggressive marketing strategies, and appeal of a more streamlined means of transactional activity. In it’s full adaptation, the digital yuan combats volatility frequently seen in cryptocurrency, virtually eliminating counterfeit bills and coins, and centralizes monetary influence. But was it done right? Is it right? What is the future of this novel form of global payments?
Critics of the novel digital Yuan cite clear shortcomings of such a system. One of them being the fundamental distinction that makes cryptocurrency so appealing: anonymity. Under China’s current governing and economic environment, it makes sense why the digital currency is preferential. However, the same can’t be guaranteed where free-market forces are stronger, particularly the US. However, with the current rate of public awareness, acceptance, and possible regulation of the cryptocurrency market, the possibility of a digital currency from the US and/or the EU seems to be closer to the “streamline finish line” than their cryptocurrency relative. The strength of the dollar and the euro are promising in this market, as these currencies offer something the yuan doesn’t: security (in many axioms).
However, it would be foolish to assume that the answer is as simple as that. Doing it right, rather than doing it fast, is worth the time, much like a relationship or marriage, I would argue. In the context of the US, it’s important to note that the US dollar is, at its core, a faith-backed system. A swift move towards digitalization could create a hostile-adaptive introduction – something that would weaken the currency rather than strengthen it. A race to the finish-line isn’t worthwhile; the battleground for the digital currency landscape is a long-term fight. Fighting for short-term gains only leads to economic rubble under the feet of domestic and global currency holders in this context. We have seen the dynamic sentiments which came about with the popularization of cryptocurrency, which carry on to this day in a slow, sloth-like manner, as it’s merely passing the stages of familiarity today. Although fundamentally different from cryptocurrency, digital currency is still incredibly novel. Not to mention, such a proposal would fundamentally shift the dynamics, structures, and foundations upon which our current electronic payment systems, and physical currencies are built upon. Companies like VISA, the cryptocurrency market, the stock market, the government, citizens, businesses, and banks will be most affected by this shift. While I’m a fan of dramatics, the introduction of a digital currency calls for a slow rollout for two reasons: adaptation and acceptance to avoid shaking up a comparatively more stable economy which is heavily affected by such shifts in a more free-market context.
The race with China’s existing Yuan and the potential digital US dollar now exists not because it’s a three-legged race, but it exists precisely for the reasons it is not.
Will digital currencies make "making it rain" a thing of the past? Just playing devil's advocate here. Fat Joe and Lil Wayne will be an anthropological mystery.