Will China’s Digital Currency becomes threat to USD?

Over the past few months, Central banks have been racing to develop their own forms of Central Bank Digital Currencies (CBDC). As per one economic survey, 80% of World Central Banks are exploring their own digital currencies. 

The Bank of England is looking into the possibility of developing its own “Britcoin”, The European Central Bank (ECB) has announced 4 years of developing its digital version of the euro. The United States of America is in the research phase. China, South Korea and Thailand are already testing out versions of their digital currencies. There is one country which has responded decisively on developing its own digital currency is China.

What prompted Central Banks to go for their own Digital Currency?

Central Banks have observed that millions of business is going on in front of them without their intervention. People are allowed to transfer money from one place to another without any government or bank being involved. Well-established payment companies like VISA and MasterCard have given Bitcoin in particular a massive boost. If there is no Bitcoin, the entire business would go through respective central bank of the country.  

Beijing is ahead in the race

China is ahead of all Central Banks in the world in developing their own digital currency. The People’s Bank of China (PBoC), the de facto Chinese equivalent to the Federal Reserve, backs the currency, which can then replace cash in circulation. It is very clear if we observe the recent decisions of China to strengthen the financial system.

·         Ban on homegrown payment apps

China recently banned homegrown banks and payment giants like Ant Group and Tencent from handling cryptocurrencies. Many people in China have already taken part in trials of the digital Yuan which is spending their government issued coins in Chinese outlets. Chinese government has already plans to promote digital Yuan or eCNY transactions with the people who live in other countries.

·         Crackdown on Bitcoin mining

China is the best choice for the miners in the world for mining cryptocurrencies. It’s estimated that 65% of Bitcoin mining takes place in China. The crypto policy has changed in China in the recent past. China’s announcement of a mining ban in China’s Sichuan province has created an exodus of miners seeking refuge for their hardware overseas. 90% of the country’s mining capacity will be shut down as a result of recent bans. China has shown environmental concerns to defend the decision.

U.S. dollar at risk as China races with digital Yuan

It is reported that China’s digital Yuan could enable the country to avoid Western sanctions by lessening its dependence on the U.S. dollar and it might be a threat to U.S. reserve currency status. Reportedly, G-7 nations are worried about Chinese Yuan. In 2020, nearly 60% of global foreign exchange reserves were held in U.S. dollars whereas Chinese Yuan, in contrast, made up just over 2% share. If China’s digital Yuan came into force, it could help North Korea to avoid U.S. sanctions on launching of nuclear missiles.