The Chinese government recently announced the start of testing of e-RMB, a digital currency on blockchain paired at 1:1 with the Chinese fiat currency and backed by the country’s central bank. The announcement piqued the interest not only of the cryptocurrency community, but also of the entire international financial system. The question is: what is the Chinese government’s goal when issuing its own digital currency and what impacts can this have on the world economy?
The main goal seems to be related to greater control of the Chinese government over transactions with its currency. With its own currency, the government would be able to track in real time all transactions made between its citizens. “While there is little change for the end user from the perspective of central bank supervision, this is quite a change”, said professor Xu Yuan of Peking University’s research development institute in an interview with Chinese state TV CCTV.
For instance, the country could have greater control of resources against money laundering and tax evasion. In addition, the central bank can use a coding system to control how money is used. That is, if the central bank transfers funds earmarked for small business loans to a commercial bank, it can ensure that the money is only activated when it is actually transferred to one.
Another stated aim of e-RMB is to be an alternative to the dollar in international transactions. “A sovereign digital currency provides an alternative to the dollar settlement system and mitigates the impact of any sanctions or threats of exclusion, both at the country and business level”, said a report in the state-run China Daily newspaper. Therefore, it means a reportedly geopolitical objective and another element in the trade war between China and the US.
China’s digital currency threatens dollar as international settlement currency
The Bretton Woods treaty, after World War II, established the dollar as a reserve currency. And consequently, it gave the United States an advantage over other countries, as the country holds the issuance of the world’s leading settlement currency. With this, the country controls the issuance of money worldwide. By issuing a currency of its own, the Chinese government seems to be trying to attack precisely this domain.
A sovereign digital currency provides an alternative to the dollar settlement system and mitigates the impact of any sanctions or threats of exclusion, both at the country and business level.
Another aspect is the possibility of the currency becoming an instrument for circumventing international financial sanctions. In this way, Beijing could do business freely with nations that oppose the United States and therefore suffer restrictions on international trade. It would be a way for the Chinese government to expand its area of influence and strengthen these regimes. And it is one of the pillars of Transfero’s investment thesis that foresees the loss of influence of the dollar in international trade and its consequent weakening.
It is worth remembering that digital payments are already quite popular in the country. Thus, it is not uncommon to see small businesses accept these means of payment in a very natural way. Last year, digital payments totaled US$ 49 trillion. Therefore, if the goal was only to facilitate transactions between citizens, there would be no need to create a state-issued digital currency.