China's Digital Currency Foray

Digital currencies like Bitcoin have been around for many years. But they’re all unofficial currencies, i.e., they’ve never been issued by any government. China has now initiated “large scale internal testing” of a digital wallet app, “moving a step closer to the official launch of the world's first sovereign digital currency”.

 

I found this interview with Qu Qiang and Edgar Perez quite informative on the topic. First, what difference does make if a digital currency is government issued or something like Bitcoin? Well, for one, it becomes legal currency. Which means it can be used for everything, not limited to situations where the buyer and seller are willing to trade Bitcoins. Plus:

“The money will be anchored to the nation's credibility.”

Remember how Bitcoin exchange rate against physical currencies has fluctuated like crazy at times? That’s not a very attractive feature for any currency. Whereas a government would be incentivized to keep its own digital currency stable.

 

But don’t we already have the ability to pay digitally, via good old Internet banking and apps like Google Pay? True, but with that system, physical money still exists in the economy. Which, as we know all too well, allows for “underground market, anonymous money, and money laundering”. But if you switched to a government issued digital currency which then made physical cash obsolete (and illegal) over time, you can see all the problems it could eliminate.

 

Plus, remember how we need to link apps Google Pay to an actual bank account? That is often a challenge for people in poorer countries who live in remote areas. Plus, banks are not too keen to open accounts for people with very little money. Like Africa, India and yes, even parts of China. An official digital currency helps:

“There is no need for users to have bank accounts to be able to be part of this system. They will be able to have a digital wallet (mobile app) that will receive digital currency from a commercial bank.”

 

Ok, so why didn’t the West take the lead on this then? Why China?

“China has very good electronic payment already, Alipay, WeChat Pay… On the other hand, Chinese citizens already adapted to mobile payments. People's habits has already been nurtured.”

On this front, I wonder if India too seems headed in the same direction of increasing electronic payment usage. China, of course, is much farther down that road than not just India, but the entire West (except maybe Scandinavia):

“I think the national policies and market-driven business models are all coming towards the internet-pro policy and online shopping-pro merchants.”

 

What are the risks of switching to a digital currency? For one, digital counterfeiting. Yes, the blockchain tech on which Bitcoin was built seems to have solved that problem. But when a country goes down that road, they need to be even more sure that no hacker, private or enemy country backed, can break the system. Another scenario for old tech paper currency took me aback:

“Just imagine a town in China being hit by an earthquake, there is no signal and there is no power, and people can not pay each other any more. I think the disaster will be even bigger than earthquake itself. The whole society will fall apart because exchange stops.”

 

Robert Hackett reminds us of the monetary innovation of Kublai Khan, the ruler of China, and the grandson of Genghis – the issuance of paper money as legal tender instead of precious metals:

“No longer would his geopolitical reach depend on backbreakingly mined and smelted ores hauled along the Silk Road. Instead, he could tap a boundless, lightweight resource—and make money grow on trees.”

Medieval Europeans were dumbfounded when they heard of this strange thing called paper currency. But today, fiat, paper currency (i.e., it’s currency because the government/ruler says so) is the norm everywhere! Is history going to repeat itself, asks Hackett:

“Fast-forward to this century, and China once again is remaking money. Except this time, it is paper currency that’s getting tossed; China is going digital.”

 

We’ll have to wait and watch to see China’s experience this time around.

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