Beijing certainly knows public relations. With much fanfare, the Chinese government recently announced its intention to launch the first-ever central-bank-directed digital currency, or CBDC. The press release, accompanied by a speech from the project’s head, Central Bank Deputy Director Mu Changchun, caused a stir in tech-oriented media circles, especially in the U.S. and other developed nations. One tech CEO, Jeremy Allaire, even suggested that the CBDC’s introduction could establish the yuan as an international currency, one that leapfrogs the U.S. dollar as the world’s premier international currency. In reality, China’s endeavor is a lot less than meets the eye. Rather than achieve global financial dominance, the CBDC would secure domestic control.
During the launch, China’s central bank, the People’s Bank of China (PBOC), announced that it would adopt a two-tiered system to deploy the currency. The central bank would issue the unit, but it would reach the public through select commercial banks and “operating institutions.” This two-tiered approach, as Mu pointed out, would improve the probability of the digital unit gaining general acceptance and guard against a concentration of wealth in any single institution. He also noted that the CBDC’s connection to the PBOC would ensure that all protocols against fraud, money laundering, and terrorism would still apply, as would existing laws surrounding cash management. Further, the digital units—destined for each person’s electronic wallet—will link through financial institutions to reserves at the PBOC, offering users much greater stability than other digital currencies, such as bitcoin. The Bank for International Settlements (BIS) in Basel, Switzerland agrees, endorsing the link to a centralized national currency.
Despite the excitement surrounding this announcement, little in it is new. The two-tiered approach, after all, is exactly the way money now enters economies worldwide. Central banks authorize commercial banks and other “operating institutions” to create money deposits to the extent that they are backed by their reserves. A person’s checking account—whether held in London, Topeka, or Pune, India—has a direct link to reserves at his respective national central bank. These same systems, globally, offer a digital element if one wants it. Certainly, the central banks’ reserves are digital entries akin to deposits at commercial banks. People have the option of using paper checks or paper money, but debit cards have long made this link entirely digital everywhere in the developed world—especially through electronic wallets.
In the past, Beijing made claims for the internationalization of the yuan, but not with the CBDC. Indeed, the government has said explicitly that the digital yuan would have only a domestic presence, at least at first. The internationalization claims arose in the Western media following Allaire’s speculations on the currency’s future. The technology is there, of course, and has been for some time. Any digitalized unit could be used anywhere in the world, with an Internet connection. The dollar, sterling, euro, yen, and other currencies could do the same in the existing digital structure. Paper money could, too, though large sums are bulky. But technological or even a paper presence remains far from the whole story.
Law and convenience also stand in the way of internationalization. Several countries, including the U.S., have laws about settling transactions in anything but the national currency; or, if they allow settlement in alternative currencies such as bitcoin, those laws forbid the use of foreign currencies. Even when no law interferes, the global success of China’s CBDC would require that retailers and wholesalers across the globe accept yuan in payment. That’s unlikely, since most merchants face liabilities in their local currency, whether it’s rent, payroll, or inventory costs. If they could be bullied into accepting the yuan anyway, they would, if they were prudent, quickly convert to the currency of their liabilities, effectively doing the foreign-exchange transaction after the sale, instead of the usual request that the buyer completes prior to the sale.
China’s leadership knows all this, so it must have reasons other than global financial dominance for launching the CBDC. History and the current policies of the ruling Chinese Communist Party point to domestic control as the reason for the launch. That desire has already impelled Beijing to ban bitcoin and other cyber currencies, which threatened to give the Chinese people the ability to execute transactions outside PBOC control and Party oversight. For that same reason, Beijing strictly controls a foreign presence in its financial system, as such a presence would offer the Chinese public and businesses the many means common elsewhere in the world to move monies into and out of the country. Since paper money is the only means left in this structure that lets the Chinese transact anonymously or move wealth out of the country without the authorities’ knowledge, the PBOC would love to see it disappear. Widespread use of the CBDC would go a long way in that direction, giving the authorities complete oversight.
If China’s CBDC is indistinguishable from what is presently done throughout the developed world, then there is almost nothing new in the Communist Party’s intense desire to impose its authority throughout Chinese society. Interestingly, Beijing’s demands for control and the resulting reluctance to allow open, easy trading in the yuan is exactly what makes continued media coverage so preposterous. No currency that denies free trading and free movement can become the world’s premier reserve and international currency.
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