Digital currencies could become substitutes not just for physical cash but also for bank reserves, writes Andy Mukherjee
30 December 2019 - 12:10It’s far bigger than that. Yes, just like any other crypto-currency — or for that matter, cigarettes in POW camps — the upcoming digital yuan will be “tokenised” money. But the similarity ends there. The crypto-yuan, which may be on offer as soon as 2020, will be fully backed by the central bank of the world’s second-largest economy, drawing its value from the Chinese state’s ability to impose taxes in perpetuity.
It may start small, but the digital yuan can disrupt both traditional banking and the post-Bretton Woods system of floating exchange rates the world has lived with since 1973. No wonder that for China, “blockchain and the yuan digital currency are a national strategic priority — almost at the level of the internet”, says Sanford C Bernstein fintech analyst Gautam Chhugani.
The other, more concrete, reason may be that technological progress is making the status quo untenable. It’s no coincidence that China hastened its national crypto-currency after Facebook announced the Libra project, which was touted as an alternative dollar. That’s when the game changes. Reserves at a central bank are maintained by deposit-taking lenders. A digital yuan — or Singapore dollar or Indian rupee — could bypass this system and allow any holder of the currency to have a deposit at the central bank, potentially making the state the monopoly supplier of money to retail customers.
Perhaps that was fanciful, and the Libra platform has hit a wall of regulatory concerns. But if they’re offered like Spotify gift cards at the local 7-Eleven, there will be demand for tokens that are acceptable across borders, stable in value against baskets of national currencies, and can be used in global trade and investing.
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