Digital Yuan: Why China’s Virtual Currency Could Threaten Dollar Hegemony?

China has the world’s most advanced central bank digital currency (CBDC) project, with $14 billion already transacted in a long phase of large-scale testing in the country’s main provinces since 2019.

The lead is big in front of projects like Brazil, which is still studying the digital real model to be adopted and is preparing to examine proofs of concept still in the development phase. The United States, on the other hand, is even further behind, without even a consensus on whether or not the country needs an official digital government dollar.

However, this does not mean that the US is not aware of the rise of the Chinese digital currency – the concern, in fact, is public and has been intensifying in 2022. In February, US Senator Pat Toomey, a member of the Senate Banking Committee, warned about the impact of the digital yuan on US economic and national security interests in a letter to Treasury Secretary Janet Yellen and Secretary of State Antony Blinken.

In the text, he warned of what he called an increase in “the potential of the eCNY (official name for the digital yuan) to subvert US sanctions, facilitate illicit cash flows, improve China’s surveillance capabilities and provide Beijing with ‘pioneering’, such as setting standards in cross-border digital payments”.

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The message was sent in the context of the Winter Olympics that took place that month in Beijing, one of the stages chosen by China to expand the tests of the digital currency. At the Olympic Village, athletes and visitors could make purchases with just cash, a Visa card or the digital yuan.

“China’s main motive is more internal, to take control of Chinese payment methods from two private companies (Tencent and Alibaba)”, explains economist Gustavo Cunha, founder of investment firm Reset Funds, focused on blockchain and digital assets. , in an interview with Cripto+ (see the full text in the player above). “But, at the same time, it can be a way to increase your hegemony in the world”, he says.

Central bank currencies are natively digital assets that can, depending on the model, be issued by a country’s central bank directly to citizens, without bank intermediation – in this way, digital money would be a direct liability of the government, not the government. financial institution.

There is also an important technological component that allows using this type of asset for innovative financial solutions, such as loans managed by software and immediate settlement of transactions, in addition to the potential for global reach.

In foreign trade, for example, the speed and reliability provided by blockchain technology would be able to close a transaction almost instantly when compared to the traditional method.

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“The exchange rate in the world, for the vast majority of places, still depends on two days to arrive. When much on the same day. The technology associated with a CBDC can do this in a matter of seconds,” explains Cunha. “A soybean producer who is going to export to China can receive, instead of days, in a matter of seconds”.

The innovation proposes, in the expert’s view, a challenge to the US, which has a more backward financial system – the country, it is worth remembering, still does not have a unified system of instant payments, like Pix in Brazil.

This year, the digital yuan has also been keeping US lawmakers awake at night for possible geopolitical effects amid the Russian invasion of Ukraine. Also in March, shortly after the outbreak of the war, nine Republican senators presented a legislative proposal to try to regulate the Chinese digital currency.

“If left unchecked, technologies like the digital yuan will enable Russia to avoid global sanctions on systems like Swift and allow the CCP to continue to surveil and threaten its citizens,” Senator Blackburn, one of the project’s leaders, said in a statement. to the press at the time.

Last week, Mu Changchun, head of the Chinese central bank’s digital currency research institute, said that user data will only be tracked if criminal activity is suspected. Currently, citizens participating in the tests can open four types of digital wallets, with daily transaction limits corresponding to the amount of personal information provided.

Despite Americans’ concern, however, there are still technological hurdles to overcome in order to transform something like the digital yuan into a currency with a global reach – capable, for example, of evading economic sanctions.

For Cunha, from Reset Funds, the great challenge is still to build the communication infrastructure between digital currencies that are different from each other, something that is not yet on the horizon given the current phase of testing. “To move from testing to a model that will be used all over the world, and this model is interoperable for several countries, it still takes time. From 5 to 10 years”.

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