china is light years ahead of the united states in phasing out old-fashioned paper money. now the central bank of china is preparing to test a digital currency. And some observers say it could usher in a new economic arms race, challenging us for supremacy. uu. dollar.
Already, hundreds of millions of consumers in China have become accustomed to paying for their purchases without cash, using popular smartphone apps such as WeChat and Alipay.
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“everything is immensely convenient” in china, said martin chorzempa, a senior fellow at the peterson institute for international economics. “you pretty much only need these two apps to do just about anything. you walk into a restaurant, scan a code and order your food. no waiting for a waiter. all payments are automatic. it’s pretty amazing.”
Chinese tech companies (counterparts of amazon and facebook) took the lead in developing this system. they jumped ahead of their u.s. competitors out of necessity, because China did not start with a well-established payment system based on credit cards.
“When amazon started, it wasn’t much of a challenge to figure out, ‘well, how are people going to pay for the books they order?’ said patrick chovanec, silvercrest chief asset management strategist. “With China, a lot of people didn’t have credit cards, so they had to come up with ways to make it easier for their customers to do this.”
Now that tech companies have paved the way, China’s central bank wants a piece of this digital action. The bank has been working on a digital currency for the past six years, but the effort accelerated last summer after Facebook revealed plans for its own form of electronic money, called Libra.
“They are definitely one of the most advanced central banks in the world in thinking and moving forward on this issue,” Chorzempa said.
China’s central bank was concerned that if nearly 2.5 billion Facebook users suddenly had their own electronic currency, China’s digital money could be left behind. the bank rushed to complete design work and is now reportedly preparing for the first pilot tests of its digital currency.
The digital yuan is expected to function more like its paper cousin than a cryptocurrency like bitcoin. its value is pegged to the regular yuan, so it is expected to be relatively stable. and the central bank will be able to monitor every transaction, so you won’t have the anonymity of bitcoin.
“Actually, the term that Chinese central bank officials have used is ‘controllable anonymity,’ which is one of the most Orwellian statements one could think of,” Chorzempa said.
if china stepped on the accelerator after facebook’s announcement, us regulators. uu. hit the brakes.
“Libra raises a lot of serious concerns, and those include privacy, money laundering, consumer protection and financial stability,” Federal Reserve Chairman Jerome Powell told lawmakers last July. “Those will have to be thoroughly and publicly appraised and evaluated before this proceeds.”
Libra has also faced skepticism from other industrialized countries. Some of Facebook’s original partners in the company, including Visa and MasterCard, have backed out.
But Facebook CEO Mark Zuckerberg is undeterred, presenting the forex race as an international competition.
“China is moving quickly to launch a similar idea in the coming months,” Zuckerberg told a House committee in October. “If the United States does not innovate, our financial leadership is not guaranteed.”
princeton university historian harold james, co-author of a paper on digital currency, says zuckerberg is right.
“We’re right on the brink of some kind of gigantic technical shift,” James said.
says that the new Chinese digital currency could rival the dollar as an international means of payment.
other observers are more skeptical.
“We’re still in the early stages of this,” said Erik Nelson of Wells Fargo Securities. “if china really wants to establish itself as the main reserve currency and try to dethrone the dollar, it will have to take a lot more steps on the governance front, in opening up its markets to foreign investors. i don’t think digitization is going to be whatever you do.”
Digital currencies could make financial transactions cheaper, easier and more efficient. however, to the extent that they become popular, they could also trigger an upheaval in the global financial system, regardless of whether they are sponsored by an American tech giant or the Chinese central bank.