China jumps into the digital currency of the central bank; The US is moving slowly

China’s leadership in the digital currency is shifting its focus to US initiatives, but similar efforts at the state level are unlikely soon.

With its entry into the digital world of the still sparsely populated central bank, China is taking a company that is already relying on electronic payments and integrating it. This also gives the government a crystal ball in the spending habits of its citizens and gives the nation’s currency an advantage on the global stage.

At an even higher level, this move raises concerns that the yuan is now an even bigger challenger against the US dollar, which enjoys the status of the world’s reserve currency in which much of international trade is denominated. .

However, Federal Reserve officials have slowly entered the digital currency arena and this is not expected to change even with the additional heat coming from China.

Fed Chairman Jerome Powell recently said the central bank will do nothing about it without congressional approval. A joint project between the Boston Federation and MIT remains in its infancy.

“I really don’t think it’s changing that much, to be honest. There are two very different systems you’re dealing with between the US and China,” said David Grider, head of digital asset research at Fundstrat. “I do not necessarily think that this changes the dynamics of the role of the dollar in the world, which is probably one of the reasons [Powell is] not in such a hurry. “

However, the US risks being left behind the world globally if it ignores the disruptive nature of digital currencies.

Less than a decade ago, it seemed unlikely that Bitcoin and its colleagues would ever be anything more than a curiosity. Now, the various cyber currencies are approaching a collective market cap of $ 2 trillion, according to CoinMarketCap, which tracks the value of the sector.

Digital currencies have multiple advantages.

They provide access to the financial system for people who cannot afford their accounts or otherwise do not have access to banks.

At a time when digital transactions are expected to reach $ 9 trillion globally in just a few years, the development would allow governments to catch up on what’s already happening around the world with payment systems like WiPay, AliPay and SwiftPay.

But there are also privacy issues. The central bank’s digital currencies do not work like bitcoin and other cryptocurrencies, because the transactions would not be anonymous. Fed officials have expressed concern about privacy and implementation issues.

However, this has not stopped the global interest in digital currencies.

At the very least, China’s leader in the central bank’s digital currency space is breathing a bit in the neck of the dollar when it comes to cross-border payments.

This influence is more likely to be felt in the immediate Asian sphere where China already dominates.

Digital development also provides an insurance policy for China, if it should face global regulations and be subject to sanctions, it will still have a way to trade business.

Getting more nations on board to facilitate cross-border payments through the central bank’s multiple digital currency bridge – or m-CBDC – “could improve [China’s] regional influence over time, “said Adarsh ​​Sinha, a currency strategist at Bank of America, in a note to clients.” In the end, this is probably the real (and more realistic) goal for China than any serious attempt to displace [U.S. dollar’s] global reserve currency status. “

China will need a “compatible and coordinated system” to use the People’s Bank of China’s digital currency, and there are already signals from other central banks that a move in the area is imminent, Sinha added.

There are signs of movement elsewhere.

Thailand, for example, will begin testing its own digital retail currency for the public next year, with full implementation projects in the next three to five years.

This week, Japan also began experimenting with ways to integrate a digital currency into its system.

In the US, however, the level of urgency seems lower.

Nick Colas, co-founder of DataTrek Research and, in a previous job, the first Wall Street analyst to write about bitcoin, said a recent customer survey showed only an average level of enthusiasm for a digital currency. the US central bank.

A customer base of about 300 with a penchant for disruptive technologies has been roughly divided on whether the Fed should accelerate its CBDC timing, Colas said.

“Investors hear the Fed somewhat reluctantly talking about CBDCs, I hear them talking about risks, and they’re kind of internalizing and saying, ‘If the Fed sees risks, maybe we shouldn’t go that fast,'” Colas said. “People are remembering that the Fed is fighting the problem, and if the Fed is fighting it, it’s not something to rush.”

Certainly, there are voices calling for faster action by the central bank.

Global payment processor Ripple, which issues its own XRP currency, has written a report strongly encouraging the US to move forward.

The company pointed out, among other things, that obtaining emergency rescue payments to individuals in the early days of the Covid-19 pandemic would have been much easier with a digital currency available to the government.

“[Central bank digital currencies] they have enormous potential, but they must first overcome many challenges, “the Ripple report said.” Now is the time for central banks to explore these issues, develop common solutions and ensure that the next evolution of money benefits more people and businesses and makes the world a better place. “

But the Fed will continue to take its time, despite questions about the extent to which China’s movement threatens the US and the global position of the dollar.

“Now and for the next five years, it’s not like that,” Colas said. “In the last five years, if China’s economy continues to grow as it has done in the last 10, if their share of global trade remains as it has done and people are starting to adopt it, in the long run, for sure. [it’s a threat]. But it is not a short-term risk. “