Imagine a world where you no longer require to make international payments via dollar and you have an alternative. Or imagine that an alternate currency emerges as a global financial superpower to challenge Dollar’s dominance as the reserve currency. Or suppose various MNCs operating in a particular country are forced to adopt the digital currency of that country and not dollars. This might have sounded to be a far-fetched dream a couple of years ago, but not anymore.
In the year 2009, Satoshi Nakamoto (an individual or a group of them, nobody knows who it is, many have claimed themselves to be Satoshi) introduced Bitcoin to the world. Bitcoin was created with the intent of removing any third-party intermediaries (banks) required to conduct monetary transfers, while also promising lower transaction fees than traditional online payments. He/They wanted to make the monetary transaction process ‘decentralized’.
So how does Bitcoin work? Suppose you want to transfer money to somebody in country X from country Y. You can store bitcoins in a ‘digital wallet’ and send them over the internet. Sounds spooky right? Well, the transactions are authorized by a digital signature and verified by a network of miners (they get rewarded with bitcoins for verifying the bitcoins, btw). And once verified, the transactions are stored on a permanent ledger known as ‘the Blockchain’. This ledger keeps a track of all the transactions, and each of these transactions has an associated private key which is used to authorize transactions. And this key is known only to the owner.
But Bitcoins have an inherent problem within them. They are very volatile. In the year 2017, almost everybody believed that Bitcoin would be the new global reserve currency. The price shot up from $1000 - $20,000 in 6 months. But by the year 2019, the bubble burst and the price plunged to $3000 again. A global currency can’t afford to be this volatile.
Problems! That’s how new ideas are generated. So in the year 2019, the technology giant ‘Facebook’ stated that by the year 2020 it is planning to launch ‘Libra’ which will allow billions of users of Facebook to make financial transactions online (mind you, there won’t be any bank involved). And just like Bitcoin, Libra will also run on blockchain technology (the Facebook version on the blockchain) So how is Libra different from Bitcoin? Unlike Bitcoin and other cryptocurrencies which aren’t pegged to anything (the reason for wild swings), Libra would be pegged against relatively stable currencies like the dollar, yen, pound and euro making it less volatile.
Not everybody in the US loved the idea of Libra, Donald Trump tweeted that he is not a fan of ‘Digital coins’ in general and Jerome Powell, the Chairman of the Federal Reserve said that Libra could have serious national security issues since it would provide opportunities for money laundering or other illicit activities.
But China doesn't want to take any risk here, because what if everybody across the globe starts using Libra as a new payment tool, it would be very much possible that Libra will develop into a global super sovereign currency.
And hence, soon after Facebook announced its plans to launch Libra in the year 2020, China came into the picture. China which is going cashless faster than any other economy is also working on its own ‘Digital Currency’ or DC/EP (Digital Currency Electronic Payment). The efforts of one such currency only ramped up when Facebook announced Libra. So what is this all about? And is it in any way similar to cryptocurrency? (Btw, China banned cryptocurrency trading in the year 2017) So far we read that cryptocurrencies are volatile and decentralized. Now China, using the same principles underlying bitcoin of a blockchain ledger, wants to make A State-sponsored ‘Centralized’ digital currency, i.e., the Central Bank of China will regulate and monitor it. And this digital currency will be of course pegged against the Chinese Yuan (ditch volatility).
China is already on its way to becoming a cashless society, almost 620 million Chinese (almost 50% of the population) already use apps such as Alibaba’s Alipay and Tencent’s WeChat to make payments for everything from groceries to shopping (both these companies handle close to 90% of the mobile payments in China). To the Chinese, the digital currency which will be provided in the mobile wallet should mean much the same. But unlike Alipay or Wechat, in this new system, a low - value transaction could go on even if both the parties are offline. So how will it work? The four major national banks and three major telecommunication companies will issue the currency to the public. Here’s the catch, the national banks will only be responsible for distributing the tokens, the funds won’t reside in bank accounts. And just in case an intermediary goes bankrupt, it’s safe because it is a sovereign liability. China has already started the trials of this digital currency. And guess what? American companies Mcdonald’s, Starbucks and Subway are also involved in this trial.
The introduction of digital currency will change the economy at all levels: from global to personal finance. The introduction of digital currency could increase the tax collection of the state to up to 100% and also simplify the process of tax collection. And also the government will have access to a large amount of data of its citizens and where exactly they are spending money. Digital currency technology will not just help in tracking the money of the public, but also the money spent by the state (if the money is utilised for the purpose it was collected for), which will in effect help in reducing corruption.
If this plan materialises, China could become the first nation to go completely cash-free. And that would reverberate across the global financial system.