While many other countries have been taking a back seat and waiting to decide how exactly they should approach blockchain technology, China has been proactively exploring its application in decentralized finance. This week China announced a certification system to regulate a broad range of fintech products. China is clearly priming itself to become a leader in blockchain and decentralized finance.
In an example of what some might attribute to aggressive competitive activity between China and the United States, China is planning on launching their own digital currency, and media reports show that it will be released very soon. Financial news outlets in recent months have focused their commentary on ‘Libra’, the stablecoin helmed by Facebook. China’s forthcoming stablecoin, which is reportedly backed by the yuan, is set to send shock waves through the alternative finance sector.
A senior official at the Chinese central bank has stated that China’s digital currency will be similar to Libra in that it will have the ability to be used across major payment platforms, including WeChat and Alipay, which both dominate the mobile payment market in China. If Libra loses more of its backers and continues to face regulatory speed bumps, the Chinese Central Bank plans to swiftly overtake and competitively position China’s digital currency in emerging economies.
However, China’s forthcoming currency has also come under intense scrutiny due to its transparency flaws. Millions of transactions on Alipay and WeChat move between digital wallets without making contact with state controlled banks. If the Chinese government desires to track transactions that take place on these platforms, it must go through the parent companies that own WeChat and Alipay. Whereas, the new digital currency will provide the Chinese government with direct access to track every transaction made by every user.
The Chinese government is infamous for its surveillance capabilities; the government has installed over 200 million surveillance cameras in the country, which equates to approximately one camera for every seven citizens. Similar concerns have plagued Facebook due to their access and handling of customer data that has resulted in controversy in recent years. These concerns may ferment and cause further distrust of both Facebook and the Chinese government, calling into question the likelihood of widespread use of either digital currency.
The New York Times recently reported that Chinese officials stated their aim is not to copy Libra, but to get ahead of a “potentially momentous shift in the global financial order”. This indicates the increased international interest in alternative finance. The Chinese Central Bank will most likely peg each digital yuan to an actual yuan and then distribute the same to commercial banks. This currency will likely avoid the volatility associated with many cryptocurrencies, however, it will be encumbered with another flaw: its value will change in tandem with the value of the yuan.
In recent years, there has been a commonly shared consensus among economists that the yuan has been undervalued between 15 percent and 40 percent for many years. In 2015, the International Monetary Fund (IMF) declared that the yuan was not being undervalued against the dollar given its recent appreciation. Since, the Yuan has faced a period of intense volatility due to the trade war between China and the United States.
This would indicate that the value of the currency holder’s savings stored in the form of this forthcoming digital currency would change in tandem with the value of the yuan. Meaning, the holders of this currency will be faced with potentially high levels of volatility reducing their purchasing power in periods of depreciation.
Fiat-pegged stablecoins certainly suffer from less volatility than most cryptocurrencies on the market, however they still do experience fluctuations, depreciation, and are vulnerable to currency manipulation. The US dollar, regarded as one of the most trusted fiat currencies, has lost more than 55% of its purchasing power in the last 25 years alone, and in the same period, the Euro has lost approximately 44% of its purchasing power.
This indicates that finances stored in digital assets pegged to fiat currencies can depreciate in value at the same rate over time. They are also subject to short term fluctuations that may be caused by political events or even natural disasters. Digital currencies like Libra and the digital renminbi are likely to face levels of volatility and unpredictable fluctuations due to their tethering to fiat structures.
However, world economic growth on the other hand, has increased at an average rate of 2.5% annually for the past 25 years despite market fluctuations within each country, thus providing a stable and predictable growth trend and reliable measure for value. Amidst the global currencies popping up like the digital renminbi, Libra, Frax, Venus, and others, merely represent digitized versions of a flawed monetary system and none are actually representative of, or leverage the sustainability of the global economy itself.