The decision of the People’s Bank of China (PBOC) to launch a digital currency will have a significant impact, not only on China but on the world as well. The main currency at threat is the Dollar, which has had a strong font for a long time.
China has had competition wars with the US for some time now, and through the currency is one of the avenues that it hopes will go through. China wants to be independent because it is tired of relying on the United States monetary system. It intends to come up with a currency that will domineer and overtake the US currency.
Rise of digital currency
There have been many developments in Fintech, and one of the main events is a digital currency, which many have embraced positively. That made some banks and governments to develop their own digital currencies.
The main advantage of digital currency is that it can cut down on intermediaries and hence make financial transactions instant with lower transaction fees. This will help China as it does large transactions, especially with the rest of the world through trade. Having a digital currency will increase efficiency and make currency internationalized.
The US dollar has been used extensively as a reserve currency in the world. The fact that China has overtaken the US in digital currency innovation means that it poses a threat to the US dollar.
China’s strategy is to launch the renminbi through a two-tier system, which will allow both the PBOC and commercial banks to issue the currency legitimately. It will start by giving seven institutions the currency, which will comprise of the largest banks in the world and the two largest financial technology companies in China, including Alibaba, Tencent, and Union Pay. The money will then be disbursed to those who are doing businesses, especially Chinese citizens.
China plans to use the currency for cross-border transactions, which will expose it and make it grow. The government of China backs the currency; hence some challenges facing cryptocurrencies can easily be smoothed out. A peer-to-peer payment system will make trade efficient, and that will give the renminbi a significant advantage.
It is up to the US to take the digital currency initiative because it still wants to remain ahead of the game. When everything goes as planned, and the currency is embraced by WeChat, Alibaba, Alipay, UnionPay, the US is under a significant threat.