With a CBDC, a nation’s central bank could affordably and efficiently issue its digital currency and a corresponding value token and cash substitute. In addition, the website Yuan Pay App provides fast deposits, withdrawals, and trading strategies to bitcoin traders. These could be exchanged for traditional fiat money at any time or used to make purchases without incurring interest charges or fees from the financial institution that issued the currency.
This post explores how nations such as China are already looking into developing their CBDCs and what it might mean for China and all of us in the future. Digital Yuan (and digital dollars, pounds and other fiat currencies) could be the future.
CBDCs are the opposite of Bitcoin in that they’re designed to be 100% centralized, relying entirely on the issuing institution for their value and transferability. As such, CBDCs can be thought of as a form of digital cash. It would eliminate the need for physical cash and replace it with a digital currency controlled by central banks.
Such a significant development would have garnered more attention from the global media, but there has not been much discussion in the news about CBDCs since China’s announcement in 2014.
In addition to making payments easier for the public and opening up new revenue streams for banks, central banks would also benefit from having control over their money supply. With this level of control (as long as it remains non-inflationary) comes considerable power in the hands of central bankers. So let’s explore whether the digital yuan has the potential to replace fiat currency.
Digital Yuan is a better way of storing money:
With central bank money, you don’t need to store physical cash. Instead, you can have an electronic record of where your cash is. Digital yuan is a fiat currency with a dual monetary policy: it’s both interest-free and inflationary at the same time. This way, the digital yuan will be a great way to store money. It will reduce the need for holding physical cash and increase the demand for physical cash because it will not be inflationary.
With a CBDC, creating money at the micro level is straightforward, but it takes more work to have money in circulation. Central banks can make money more readily available by implementing negative interest rates and increasing the size of the money supply. It is because there are no limits on how central banks can issue much physical cash, so they can print more of it whenever they want to balance the budget or stimulate the economy.
Controlling monetary policy by adding or removing cash from circulation has been problematic for some central banks. For example, when the European Central Bank started experimenting with quantitative easing in 2013, it created a massive amount of digital Euros to put into circulation and increased the money supply. But unfortunately, it led to an increase in inflation and eroded its credibility as a stable monetary authority.
In China’s case, Digital Yuan would have no limit on the amount of cash printed by people. You could even print more than one digital yuan for each fiat yuan. Of course, China doesn’t need to make this move today because they’re still not experiencing much inflation, but it’s possible to remain competitive and maintain their peg against the US Dollar.
Digital Yuan can reduce corruption:
The government is in a perfect position to issue digital yuan because most of its spending is not on goods and services. Instead, it’s mostly on national security and social welfare, which should be pretty easy to fund with the money printed by the government. Moreover, it is preferable because it eliminates the need for intermediaries such as high-level bureaucrats who might attempt to cash in their position or use their power for personal gain.
It can eliminate many types of corruption and political influence that currently permeates our purchasing decisions. Instead, all transactions will be done by algorithms and computer programs with no room for corruption or abuse.
A CBDC could reduce corruption by making it more difficult for ordinary citizens to access large amounts of cash. Currently, it’s easy for corrupt individuals to buy large quantities of cash and smuggle it out of a country, but they would have a more challenging time doing that with digital money.
This influence is currently more prevalent in China because the Chinese Yuan needs to be fully convertible. People prefer other currencies and can only exchange them in limited ways, so Chinese citizens have little choice but to convert their money into US dollars or other foreign currency to make large transactions.
Will digital yuan ever replace fiat currencies?
With a limited supply and no interest, the likelihood that the digital yuan will replace fiat currencies is slim. Most of us would choose to have inflationary currency with interest rates over a non-inflationary fiat currency.
With a CBDC, China could have a competitive advantage in providing loans to countries struggling with crippling debt problems and hyperinflation. For example, Brazil and Venezuela rely heavily on imports as they cannot produce their goods in large quantities due to their lack of natural resources and low literacy rates. In addition, many workers employed in their mining industries could be more productive and keep up with efficient mining operations.
Suppose China could create digital yuan that can be spent abroad and create jobs in their own country. In that case, they could have a competitive advantage over other countries in borrowing money to help their economy. It is because they can make loans usable outside the country, while other countries are limited by their own currency’s ability to be spent outside their borders. One way this would work is by limiting the amount of local currency that users can transact with away from the country. Although it’s possible to burn your money instead of bringing it into the country, this isn’t appealing because you’d essentially destroy your own economy.