As the Chinese government clamps down on decentralized cryptocurrencies and seeks to launch its own central bank digital currency (CBDC), the digital yuan, industry observers believe the move could pave the way for the launch of CBDC-to-CBDC exchanges. At the same time, the digital yuan and other CBDCs to be rolled out by other countries could hurt the dollar’s status in global finance in the long-term.
The forecasts were offered by Yaya Fanusie, Adjunct Senior Fellow at the US think tank Center for a New American Security (CNAS) who has studied the digital yuan project. Speaking to blockchain analysis company Chainalysis for the purpose of its latest report on the Chinese market, the analyst said the digital yuan is unlikely to become a threat to the dollar in the short-term, as it will take time before Beijing sufficiently promotes its use outside China.
Until now, 35 Chinese banks have embedded digital yuan wallets in their mobile apps, while a further 94 banks aim to access the Chinese CBDC through a new platform, Shanghai Securities News reported.
However, the CBDC’s roll-out is likely to have major long-term effects on global payments.
“I think they’ll try to make arrangements with other countries where they enable CBDC-to-CBDC exchange. Think of it as an atomic swap of CBDCs,” Fanusie said.
Under this type of arrangement, the report said, A in China could send digital yuan to B in Malaysia, with a currency exchange happening automatically so that B gets digital Malaysian ringgits and “without either party having to touch their non-native currency.”
These transactions wouldn’t rely on the SWIFT system, it said.
“If they became the norm, there would be less need for people outside of the U.S. to hold U.S. dollars,” the report stated, with Fanusie adding that: “This isn’t a risk for 2022, but probably more for 2032 and beyond.”
Fanusie also consider the digital yuan to be part of a larger war of data proficiency in which the US risks falling behind.
“So far, China has been more innovative than the U.S. with fintech. If that happens with blockchain technology too, the U.S. economy risks missing out on the next wave of data-driven innovation,” the analyst said.
Rather than simply creating their own CBDC to mitigate this risk, Fanusie opined that, while a US CBDC project should not be ruled out, Washington policymakers need to think beyond a digital dollar and promote innovation in the fields of blockchain, fintech, and monetary policy through organic growth, and not a top-down approach.
Fostering innovation could be stimulated through partnerships between federal agencies and US universities to create a sandbox for the development of blockchain-focused projects.
“That’s how the U.S. led the development of the internet. There was a directive for universities to create a computer networking system the military could use. That infrastructure was then leveraged for much broader civilian use and unlocked a revolution in business innovation,” concluded the researcher.
Per Chainalysis, one thing is clear:
“China appears intent on developing a digital yuan for immediate domestic use, and possibly future international use. Improved monetary policy and financial surveillance of Chinese citizens appear to be the project’s short-term goals, but in the long term, the proliferation of the digital yuan alongside other CBDCs could compromise the U.S. dollar’s status as the world’s reserve currency.”
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Source: Cryptonews
