Kevin Bae

Non-Social in a Socially Networked World

China digitizes the Yuan

Don’t confuse this with cryptocurrencies though. The Chinese version is just a digitization of their traditional currency… the Yuan. The Chinese government will know details about every single transaction and they will be able to use this to control their population. If your social score isn’t sufficiently high they’ll shut off your money spigot. They’ll be able to control what you buy and where.

China has indicated the digital yuan will circulate alongside bills and coins for some time. Bankers and other analysts say Beijing aims to digitize all of its money eventually. Beijing hasn’t addressed that.

Digitized money looks like a potential macroeconomic dream tool for the issuing government, usable to track people’s spending in real time, speed relief to disaster victims or flag criminal activity. With it, Beijing stands to gain vast new powers to tighten President Xi Jinping’s authoritarian rule.

Wall Street Journal

Money is already digital. In the United States and Europe if you move money from one account to another with a transfer there is no one actually shipping physical cash anywhere. They move the money via journal entries. What we have is a hybrid system where our paper money and coins are physical representations of an electronic entry at the central bank. Money has been virtual since governments stopped backing their money with gold.

Western countries are a short step from joining China. Most people use debit and credit cards for their transactions already. The only thing standing in the way of Western governments of instituting the same system is capitalism. Banks are independent of the government and to copy China would be a de facto nationalization of banking.

I would like to see a decentralized U.S. crypto-dollar though. Since so many transactions occur online in digital form it would be great to send micropayments of a penny or fraction of a penny. The current system tacks on too many fees to be able to make it worth while. But if they remove the blockages money can flow where ever we want like water. Utilizing crypto and blockchain technologies can also keep our transactions largely private and hinder government’s ability to shut down an individual’s ability to spend their own money.

Back to China. Taking their currency digital can have implications for the United States. A government backed digital currency that exists outside traditional banking could circumvent the United States’ ability to place economic sanctions on people and countries.

Digitization wouldn’t by itself make the yuan a rival for the dollar in bank-to-bank wire transfers, analysts and economists say. But in its new incarnation, the yuan, also known as the renminbi, could gain traction on the margins of the international financial system.

It would provide options for people in poor countries to transfer money internationally. Even limited international usage could soften the bite of U.S. sanctions, which increasingly are used against Chinese companies or individuals.

Wall Street Journal

I’m less inclined to see this as a threat for now. It really depends how other nations react and if they start trading in it. If that happens we won’t be far away from World War III. I don’t see the United States easily allowing China to supplant the dollar as the World’s reserve currency.

The U.S., as the issuer of dollars that the world’s more than 21,000 banks need to do business, has long demanded insight into major cross-border currency movements. This gives Washington the ability to freeze individuals and institutions out of the global financial system by barring banks from doing transactions with them, a practice criticized as “dollar weaponization.”

American sanctions on North Korea and Iran for nuclear programs hobble their economies. Swiss banks abandoned their famous secrecy eight years ago to avoid Washington’s wrath in a showdown over taxes. After the February coup in Myanmar, the U.S. used sanctions to block the movement of top military officials’ financial assets through banks. The Treasury’s database of sanctioned individuals and firms—the “Specially Designated Nationals and Blocked Persons List”—touches virtually every nation on earth.

Wall Street Journal

The video below is enlightening.

Bitcoin is a different animal and I’ve talked about it before. I’m not a big proponent of it as a currency, investment, or storage of value. If a money is not backed by an army it’s worthless. At best it’s a secure barter system where the users agree to a value. But, try to take that out to the wider world or economy. If a government says you can’t use it to convert to their currency then what do you have? A bunch of electronic bits on a hard drive.

Image by moerschy from Pixabay