The dollar: it’s the means by which most of the world conducts its trade. Oil is valued in it, so is gold. Governments often measure their debt by it. And for the US, the dominance of the dollar represents one massive advantage. It means the US government can spend what it likes, theoretically — the mighty dollar gives it purchasing power — not for the US the fundamental need to balance its books. Never will the US have to borrow from the IMF. What would it borrow? Dollars? The very currency it can print. That is why China’s plan to issue a cryptocurrency – and one that it will actively encourage non-Chinese players to use – poses a threat to the very fabric of the global economy that has served Uncle Sam so well.
While the three other big central banks – The ECB, the Bank of England and the Bank of Japan – have a similar ability to print money – there is just not the international demand of their currencies to soak it all up.
This dollar dominance is not popular — which is why many countries would like to see an alternative.
According to a report on Forbes, China plans to issue a new crypto currency — transferable from the renminbi (yuan). The currency, which is being referred to as DC/EP (Digital Currency/Electronic Payments) will be distributed by some of China’s largest companies: Alibaba, Tencent, The China Construction Bank, The Industrial and Commercial Bank of China, The Bank of China, The Agricultural Bank of China and Union Pay. In practice, this means the companies will buy the currency from the Chinese government before distributing it.
The big question is why? Why would China want its own cryptocurrency?
Normally, the advocates of a cryptocurrency are libertarians. They hate the idea of a central authority having control over the currency they use, and of interest rates.
The Chinese government hardly wants to give up control of its currency.
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According to Forbes, Mu Changchun, head of China’s cryptocurrency research lab and deputy director of the Paying Division of the People’s Bank of China (PBOC), favours the idea of a cryptocurrency running in parallel with the Chinese currency, as this will “consolidate China’s national currency sovereignty, ensure that the central bank maintains control over monetary policy affecting the currency, increase the likelihood of people using the currency, distribute the risk of having all the authority directly in the hands of the central bank and encourage competition between the organisations that receive the cryptocurrency.”
It is not clear how any of those listed benefits will come out of launching a crypto-currency. However, there may be an additional benefit: contrary to an anonymised blockchain type currency like bitcoin, the Chinese cryptocurrency could furnish the state with a wealth of information about users. Ostensibly this could help fight money laundering, but China is China — and fears over a surveillance state are ever-present.
There is a further, perhaps more important, issue.
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For countries like the UK and US, owning the currency in which they conduct trade has significant advantages. In the case of foreign aid, for example, the UK may supply aid to so-called third world countries in the form of sterling. This money will eventually circulate back to the UK — where else can you spend sterling?
For the US, its control over the default international currency means it can export inflation because the dollar is one of the primary means of conducting internal commerce, especially in the emerging markets.
China has repeatedly called for an alternative to the dollar — previously suggesting that the default currency could be like the IMF special drawing rights, a system of conducting international trade using a basket of currencies.
Indeed, back in 1944, at Bretton Woods, the British economist Keynes, proposed a form of international currency, he referred to as the Bancor, linked to a basket of currencies for international trade.
The Keynes proposal was rejected by the US. The IMF and World Bank emerged as compromises.
Ever since then, the US has been a massive beneficiary of the current system. The end of dollar hegemony is surely inevitable, with China likely to become the biggest economy in the world in the next decade and India the second biggest later this century.
But could China’s cryptocurrency move hasten the demise of the dollar as the de facto global currency?
What we can say is that the Chinese plan eclipses other mooted plans for cryptocurrencies, advanced by the likes Andy Haldane, at the Bank of England. Even Facebook’s proposed cryptocurrency Libra seems simplistic by comparison. According to the Forbes report, Libra is being “designed to handle 1,000 transactions per second, [while] the DC/EP was designed to handle 300,000 transactions per second.”
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Dylan Emery, editorial director of GIMegatrends.com told Information Age: “From the limited information we have so far it looks like China’s first purpose in launching a state-backed crypto currency is to replace all coins and notes in circulation. This would allow the Chinese government to track everyone’s spending everywhere at all times.
“As I assume you’d need a smart phone or similar to make transactions, I’m not sure how viable that is considering half the country is agrarian and don’t have access to that tech — but maybe the Chinese government will be happy if just the big urban areas start using the DC/EP.
“Another important element is that we are told China is keen for this currency to be used outside of China. So perhaps for all those doing global purchases from Alibaba, etc, it will become normal to have a DC/EP account. If that happens then China will be able to start to do what the US has profited from for decades — the ability to print money and export the inflation away.”