Co-authored with Bob Lynch
As governments around the world manage their respective economic-restarts from the COVID-induced lockdown, there will be a host strategies and innovations employed to assist the process. For China, one element of that strategy may include the acceleration of its plans to introduce a digital currency.
China’s digital currency project has been underway since 2014 and reports just before the COVID outbreak suggested it could be introduced as soon as this year. Under normal circumstances, a successful digital currency would reduce payment frictions and demonstrate China’s ongoing efforts in technological advancement. But in the post-COVID era, when reviving economic growth will be paramount, the potential for enhanced commerce/consumption via a streamlined payment system becomes even more appealing.
It is not yet clear exactly how the digital yuan will work. Likely it will be an app on a smartphone that one registers. There would, of course, be robust security and a record of every transaction both locally and someplace else. Henceforth when you get paid or receive funds, it would go directly into your secured account. When you pay, it would be withdrawn from the same account.
Chinese consumers are already more familiar than many westerners with paying for nearly everything from a smartphone. Alipay is ubiquitous, and a digital currency seems to be a modest evolutionary step. Even now, tourists in China need to access the local apps to do basic things, like secure a ride or purchase food or drink in many places.
A digital currency recognizes that a payment system is a utility. In an earlier era, electricity, gas, oil, coal, telephones were utilities, but perhaps we need to re-think what are their modern equivalents. It replaces this function of banks and credit cards and their derivatives (payment systems that depend on them). It allows for instantaneous payments. It squeezes the underground economy, even if human ingenuity finds some workarounds. Tax avoidance is also made more difficult.
At the same time, in an illiberal society, the digital currency can also become an instrument that extends command and control. Every transaction now becomes part of the public record. The line, already blurred between what is personal/private, could be obliterated by the digital currency. The surveillance state can be further empowered. In a society that rates social trust, is it a stretch to think about fines as well as rewards?
One thing that the digital currency will not do is to make the yuan convertible. And barring full convertibility, it will not have any meaningful bearing on the role of the yuan in the global economy. It is currently a [very] minor reserve currency, though included in SDRs. It has less than a 2% share of SWIFT transactions. The Dim Sum bond market and yuan deposits in Hong Kong are well off their highs set several years ago. A digital yuan by itself does nothing to enhance its position in the rivalry with the dollar.