Thoughts on China’s forthcoming Digital Yuan

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Thoughts on China’s forthcoming Digital Yuan

Greetings #newsteem! It’s already been quite a while since I published my thoughts about the potential effects Facebook’s Libra Project could have, rights after Libra’s open source code was released and its project was formally announced after following a series of rumours that became more and more “real” over time.

Interestingly, and as expected as well perhaps, Libra caused quite some noise, both within and outside of the current crypto scene. Multiple and (inter)national governmental bodies have expressed their concerns about a plethora of things that might happen when Libra is indeed used at a large scale, causing a series of “hearings”. Most of those concerns boil down to -1- Facebook’s reputation regarding privacy related issues, -2- if such monetary power should be allowed in the hands of a corporation instead of a government, and -3- whether or not Libra, regarding the way its infra will (initially) be backed only by a relatively small set of project partners - thus labeled as being “centralised”, may be called a “cryptocurrency” in the classic sense of the word.

All this commotion might cause the Libra project’s release to be delayed, but it has also sparked - at least it looks like it has - an increased development speed on similar blockchain-based projects, that have the potential to form the initiation of everyday-life crypto-based digital payments. One such project appears to be the forthcoming PBoC’s (People's Bank of China) Digital Yuan, which is now rumoured to being developed for years already.

Potential effects caused by PBoC’s Digital Yuan

A multitude of online news sources have recently reported about PBoC’s Digital Yuan; you can read some articles on this topic here: 1, 2, 3, 4, and 5

In my Libra Post I’ve already argued why I think a project like Libra could lead the way for crypto mass adoption, but I think the effects on that caused by PBoC’s Digital Yuan would be truly massive.

Thus far, if I may say so, the global impact of crypto has mostly been just a promise of potential. Sure, there are working crypto payment systems, that mostly cater to the concept (which I fully support!) of “be your own bank” using crypto. But global mass crypto adoption, where crypto is used as the de facto preferred choice for payment transactions, is lagging behind undeniably. Libra could change that, but a Chinese state backed Digital Yuan may achieve that - and I mean this globally - even more…

And here’s why:

• currently, in the western world of “1st order” developed countries, the “regular” payment infrastructure works fine as it is. Sure, lots can be said about “banksters” being in control of the financial world together with central governmental organisations, or that fiat currencies are being printed from thin air not really being backed by anything other than the promise of being of stable value, but for both every day retailers and consumers in the western world there currently isn’t a “real need” to switch to crypto. If you put yourself in the shoes of - say - a local electronics store retailer, then why would you accept crypto payments right now? Doing so might bring in additional revenue streams, coming from early adopter consumers looking for ways to spend their crypto holdings, but arguably such additional revenue caused by crypto payments might be marginal; as of today that is. Those locally and regionally operating small companies that in fact already do accept crypto payments, arguably mostly do so because they’re supportive of crypto as a whole succeeding at large. Currently they don’t “need to”, they just “want to” out of ideology perhaps. But because China is such a large international exporter of consumer goods, the international importers of those goods paying for those goods using the Digital Yuan - which paired with blockchain-based Smart Contracts can have a real use case for both the Chinese exporting companies as for the international / western product importing companies - first need to acquire the Digital Yuan prior to paying for those goods. And because there exist conversion / transaction costs to acquire Digital Yuan, it will THEN become cheaper / more profitable for the international importing retailers, operating outside of China with local western consumers who are not at all dealing directly with Chinese consumers nor businesses, to accept crypto as the preferred payment method even! Because if such retailers accept crypto, they can use the same crypto to pay for the next batch of Chinese produced imported goods, thus removing the costly fiat-to-crypto and crypto-to-fiat transaction costs.
  In one sentence: a China-issued Digital Yuan will not only increase national (China-based) crypto adoption, but stimulate INTERNATIONAL cryptocurrency payment adoption among retailers.

• America’s “trade war” tensions with China might have initiated, at least pushed, Digital Yuan project developments. From China’s perspective it makes perfect sense to initiate a new, self-controlled, payment mechanism and asset class, thus reducing their need to retain US Dollar reserves and comply with US initiated international sanctions. A Digital Yuan puts China in a position to stimulate every day crypto usage, internationally. Being an autonomous global force, instead of Facebook’s Libra, a Digital Yuan does not have to deal with complying with all international governmental organisations that now seem to hinder Libra’s roll-out. Instead, the mere presence of the Digital Yuan - which developments are rumoured to be intensified due to the Libra announcements -, may itself help speed up Libra’s regulatory acceptance.
  In other words: Libra might be positioned as the “western answer” to the Digital Yuan.

• China itself has been at the forefront of mobile payment adoption, currently mostly non-crypto, led by tech companies such as WeChat Pay and Alipay. The success of these non-crypto based payment platforms, which have allowed consumers and retailers to seamlessly transfer payments without the need of using traditional banking systems, have put Chinese banks in the position of the cut-out middleman. And again, in order to use the Alipay / WeChat Pay digital payment services, consumers first need to deposit funds into those digital wallets, charged with deposit and withdrawal fees. Exactly like I’ve predicted (first bullet point) what’s going to happen with international importing retailers acquiring the Digital Yuan, the Chinese consumers currently using WeChat Pay and Alipay are incentivised - because of those deposit / withdrawal / transaction fees - to NOT switch back to fiat funds (held at traditional banks) again, but instead to keep their funds at WeChat and Alipay. This effect in turn opens up new business models for other financial services, serviced by WeChat Pay and Alipay, thus effectively circumventing traditional Chinese retail banks.
  Those Chinese retail banks therefore have a vast interest to promote the use of Digital Yuan-based market adoption, at least within China, which will probably catalyse Digital Yuan usage first nationally (within China) and therefore soon also internationally, cross-bordered.

Reasoning “beyond”

When Libra was announced, I read a lot of posts and comments that were - to my opinion at least - overly negative about Libra, “because it’s created by Facebook”, because it’s centralised and therefore not a real crypto, because “the powers that be” will again re-claim their market hegemony, et cetera.
What I think is needed to get cryptocurrencies like Bitcoin but also Steem mass adopted, is to welcome new initiatives like Libra and China’s Digital Yuan, despite their centralised nature. I strongly believe that it’s projects like these that will “pull in” the masses, both organisations and individuals, that are not yet invested in nor using cryptocurrencies.

In order to fulfil the original Bitcoin vision, a mass-adopted, globally used, peer to peer payment system and asset class, without the need for traditional financial institutions to store and process transactions, we need “strong market forces” that steer towards, instead of away from, crypto usage, and help, one way or another, to create an ecosystem iterating onwards from the current financial status quo in which banks hold such a dominant position. That’s not going to happen based purely on ideology!

I like to think of cryptocurrency market adoption as a game of chess, in which every strategic move builds momentum towards a “winning situation”. In order to proceed away from crypto as merely a speculative asset, we need incentives for everybody - consumers, companies, banks, governmental organisations -, to experience the NEED for crypto. Both Libra and the Chinese Digital Yuan appear, to me at least, to provide that “perceived need”. I’m looking forward to both being released and used! Interesting times!

What do you think about the influence of projects like Libra and China's Digital Yuan to the world of cryptocurrencies? Do tell me, in the comments section!

Thanks for reading!
@scipio