China jumps to central bank digital currency; the US is moving slowly

China’s leadership in the field of digital currencies is becoming a bigger focus on US initiatives, but similar efforts at the state level are likely not to take long.

With its entry into the still sparsely populated world of central bank digital currency, China is adopting a society that already relies heavily on electronic payments and makes it a major one. This also gives the government a glass ball in the spending habits of its citizens and gives the national currency an advantage on the world stage.

At an even greater level, the measure suggests that the yuan is now an even greater challenge to the US dollar, which enjoys a world reserve currency status in which much of international trade is denominated.

However, Federal Reserve officials have been delicately walking into the arena of digital currencies, and that is not expected to change even with the added 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 Fed and MIT remains in its early stages.

“Really, I don’t think it changes that much, to be honest. These are two very different systems you’re dealing with between the U.S. and China,” said David Grider, head of digital asset research at Fundstrat. “I don’t think this will necessarily change 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. “

Still, the United States risks falling behind the world if it ignores the disruptive nature of digital currencies.

Less than a decade ago, it seemed unlikely that Bitcoin and its peers were ever 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 to people who cannot pay their bills or who do not have access to banks.

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

But there are also privacy issues. Central banks ’digital currencies do not work like bitcoin and other cryptocurrencies, as transactions would not be anonymous. Fed officials have expressed concern about the issues and the implementation of privacy.

But that hasn’t stopped global interest in digital currencies.

At the very least, China’s leadership in the central bank’s digital monetary space breathes a bit of a choke when it comes to cross-border payments.

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

Digital development also provides an insurance policy for China that, if extended in the light of global regulations and subject to sanctions, will still have a way of doing business.

Getting more nations on board to facilitate cross-border payments through a digital currency bridge from several central banks — or m-CBDC— “could improve [China’s] regional influence over time, “said Adarsh ​​Sinha, Bank of America’s forex strategist, in a note to clients.” Ultimately, this is likely to be China’s real (and more realistic) goal than any serious attempt to displace the [U.S. dollar’s] as the global reserve currency. “

China will need a “compatible and coordinated system” to use the People’s Bank of China’s digital currency, and there are already signs of other central banks imminently moving into the field, Sinha added.

There are signs of movement elsewhere.

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

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

In the United States, however, the level of urgency seems lower.

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

A customer base of about 300 with a predisposition to disruptive technologies was divided almost evenly over whether the Fed should accelerate its CBDC timeline, Colas said.

“Investors hear the Fed talking a little reluctantly about the CBDCs, they hear them talking about risks and they’re internalizing it and they say,‘ If the Fed sees risks, maybe we shouldn’t go there so fast, ’” he said. Colas … “People have reclaimed the fact that the Fed is struggling with the issue, and if the Fed is struggling with it, it’s not something to rush into.”

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

Global payment processor Ripple, which issues its own XRP currency, wrote a report strongly encouraging the U.S. to move forward.

The firm noted, among other things, that obtaining emergency payments for ransoms to people during 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 first they have to overcome numerous challenges, “the Ripple report said.” Now is the time for central banks to explore these problems, 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 is likely to continue to take its time, despite questions about whether China’s measure threatens the U.S. and the world’s dollar position.

“Now and for the next five years, it doesn’t,” Colas said. “Over the past five years, if China’s economy continues to grow as it has for the past ten years, if its share of world trade remains as people begin to adopt it, in the long run, for sure [it’s a threat]. But it is not a short-term risk. “