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September 22, 2020
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Digital yuan and its relationship with Libra: What is the future of digital currency?

Five years later, a Chinese digital currency is being tested, so the future looks very close.

This is a unique type of fiat currency and will be launched by one of the world’s largest economies, China, inevitably changing the way we view digital currency and its potential impact on the global economy.

The idea behind Facebook’s Libra

The conversation about the mass adoption of a digital currency gained momentum in June 2019, when Facebook Inc. announced its blockchain-based Libra token. Facebook CEO Mark Zuckerberg promised that Libra would not be launched until it obtained approval from the United States’ financial regulators. However, when he testified before the Chamber’s Financial Services Committee on October 23, 2019, it became clear that regulators were not prepared to classify Libra as a security token and regulate it as such.

While authorities in Europe and the U.S. are concerned about privacy and the way Facebook handles its users’ financial data, there is a greater concern about the launch of a privately controlled financial system. European regulators have expressed fears that Libra could become a threat to the global financial system and rival national banks. At the same time, any cryptocurrency poses a risk for users to exploit it to avoid global sanctions or money laundering. But unlike existing cryptocurrencies like Bitcoin, Libra has central authority and it is unclear how the Libra Association will handle this responsibility.

Even if the initial plan was to launch Libra in 2020, there is little chance that regulators will approve of it soon. Especially during an election year in the USA, there may be risks associated with this event and how it can affect the electoral process. The work still continues for the Libra Association: in April, its whitepaper was updated and new members joined the project, such as Temasek, Paradigm Fund and Slow Ventures. The Swiss Financial Market Supervisory Authority (FINMA) has also confirmed that it has received a license application for the payment system from the Geneva association that governs Facebook’s planned cryptocurrency. These announcements indicate that Libra is still in the process of obtaining and maintaining legal compliance and entering the existing financial ecosystem.

Why is the Pound a threat to the digital yuan?

On May 5, a speech was given by Li Lihui, a former president of the Bank of China who now leads the blockchain research group of the National Internet Finance Association of China, which everyone expected to be mostly about DCEP, the Electronic Payment of Digital Currency or the digital yuan. However, Li spent a lot of time talking about Libra and its potential. His passionate attitude towards the project demonstrates that while US regulators see digital currency controlled by an organization as a threat to the existing financial ecosystem, it could potentially help the United States maintain its global monetary dominance.

According to “Discussing digital currency with top officials,” a book published by the Central School of the Party of China, Libra is a good example of public-private partnership and has the potential to be adopted as an international currency. “China originally relied on mobile payment to move forward, but now Pound has the potential to change the game again,” said Hongzhang Wang, one of the authors of the book’s preface to Chinese news agency Sina.com. “We cannot deal with new risks by discouraging technological developments. This would allow American companies to build a digital currency system using blockchain technology, which could threaten or even outperform Alipay or WeChat Pay. ”Since the value of the Pound will be supported mainly by the dollar, the token may diminish the international influence of the Chinese yuan and therefore poses a threat to its plans.

DCEP is designed as digital money. The head of the digital currency research subsidiary of the People’s Bank of China (PBOC), Changchun Mu, said the currency would not need a basket to maintain a stable value. “The currency is not used for speculation. RMB is used for spending, not for speculation. It does not have the characteristics of bitcoin speculation, nor does it require the assets of the currency basket to support the currency’s value as a stablecoin. ”

Is cross-border adoption the goal of Digital Yuan?

The DCEP’s objective is focused on replacing physical cash and creating a new means for cross-border payments. Chinese consumers have already adopted mobile payment apps, so the transition to the digital yuan will be easy. Experts believe the token will work with a number of Chinese banking applications, in addition to joining WeChat Pay and AliPay services. As this is the first digital currency to be controlled by the government, it has the potential to be accepted as digital money worldwide and to challenge the dollar in the process.

The race to the finish line has just begun, so clear plans for using DCEP globally have not yet been announced. However, if successfully implemented, it could move global financial markets away from the dollar-centric system. With China being the largest exporter, it is likely that the use of the digital yuan will be encouraged for trade with Belt and Road Initiative partners. As the dollar-based system is in use around the world, this change will affect all economies, large or small.

Will DCEP and existing digital currencies coexist?

The revelation of plans for centralized digital currencies, such as Facebook’s Libra and China’s Electronic Payment of Digital Currencies, has caused waves in the crypto community. Traders and adepts of existing cryptometries tend to prefer decentralized privacy-oriented systems. The existence of an international payment system designed and controlled by a large corporation or one of the most populous countries in the world may pose a threat to the current cryptocurrency industry. Decentralized exchanges are growing in popularity as more users prioritize their privacy, which is opposed to the idea of ​​centralized digital currencies.

In October 2019, when China’s President Xi Jinping asked the country to accelerate the adoption of blockchain technologies, it became very clear that this was not necessarily good news for cryptocurrency, especially for Bitcoin. The country’s authorities have already banned ICOs and cryptocurrency exchanges in 2017 and there have been reports of a ban on cryptocurrency mining in progress. This not only affects the BTC adoption rate, but it also means that the vast majority of cryptocurrencies will not be able to compete. If plans for widespread adoption of DCEP or Libra are fulfilled, existing cryptocurrency exchanges with a large number of currency pairs offered, such as HitBTC with its 800 exemplary pairs, will have a dilemma at hand as to whether it is possible to remain loyal to their mission. Otherwise, they will have to change their policies and services to accommodate centralized digital currencies that are used globally.

The future

Although there is no official deadline for the implementation of the digital yuan, testing is already beginning in four urban areas, with a combined population of more than 38 million people. The central bank’s digital currency will not be issued en masse to avoid inflation, but will be implemented in certain branches at each stage of the test and modified according to its performance along the way. First, digital money will be issued to commercial banks and other operators. Local government officials will receive part of their transportation subsidies in digital currency. In addition, some retailers, including McDonald’s and Subway, were invited to try the digital yuan in the new Xiong’an area.

The potential effect of central bank digital currencies (CBDCs) has also sparked interest in other national banks. They can also serve as a way to promote cashless payments, which have become even more important during the current health crisis. In April, the central bank of France requested requests with a CBDC for interbank agreements, and the Bank of England (BoE) published a discussion paper “Central Bank Digital Currency: Opportunities, Challenges and Design” to “start a dialogue on the appropriate design of a CBDC and an assessment of whether the benefits of CBDCs outweigh the risks ”. It is difficult to predict how soon this new technology will be implemented on a larger national scale, but it is certain that the cryptocurrency landscape is slowly changing. It seems that it is only a matter of time before the mass adoption of CBDCs makes the decentralization argument obsolete.

Source: cryptonomist

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