China passes new digital currency law- the struggle between US-Libra and the digital yuan

China passes new digital currency law- the struggle between US-Libra and the digital yuan

After China has passed its new digital currency law the Chinese digital currency seems to be in preparation. Shenzhen will be a pilot city to test the new digital currency–maybe also to weaken Hongkong´s position as financial center. China`s goverment long resisted the introduction of a digital currency as it saw problems with national soveringity, the weaking of the central bank, money laundering, stability of the financial system and it also refered to the volatile performance of the bitcoin.

While China rejects the bitcoin, it say Yes to blockchain technology and digital currency. as Facebook tries to introduce its own global currency the Libra which is tied to a currency basket and has many supporters. China sees the coming of a digital currency as a development you cannot prevent, but you should try to controll. It also sees a digital currency as an instrument for the internationalization of the Yuan in competition with the US dollar. Li Daokui from the Tsinghua University wrote about this a programmatic article in the Global Times.

The author sees in the Libra the potential of a super-sovereign currency. Although these are used only by states that have no confidence in their own currency, the Libra for intra-China financial transactions is uninteresting and has to be rejected, but this looks different in the transnational financial actions -Here China and its companies should try to play an important role within Libya institutions in order to work for the internationalization of the Yuan.

China needs to be prepared to cope with Libra amid yuan internationalization

By Li Daokui Source:Global Times Published: 2019/8/22 21:26:46

Facebook recently released a white paper for Libra, its newly created cryptocurrency, and co-founded the Libra Association. Given that Facebook already has over 2 billion monthly users, the launch of Libra will bring challenges to the current monetary system, macroeconomic management and financial supervision. 

Libra, unlike other cryptocurrencies, has a stable currency value and is convenient and safe to use in cross-border transactions. In fact, Libra is in many ways the same as Alipay and WeChat Pay. The difference is that Alipay and WeChat Pay are directly pegged with the yuan – 1 yuan in an Alipay or WeChat Pay account equals 1 yuan of fiat money – while Libra is pegged with a basket of currencies. This difference indicates Libra is an independent currency, and one that could very well grow into an important super-sovereign currency.

Libra is based on other major currencies around the world. So far, Facebook’s money move has not triggered hostility from central banks, yet there is a possibility that the management of Libra will become a complicated geopolitical issue under specific circumstances. 

It is possible that, in some cases, powerful countries may force Facebook to intervene in the transactions of other countries, or even freeze or confiscate Libra accounts based in those countries. Alternatively, considering Facebook’s current ability to influence public opinion, the giant could perhaps use Libra to paralyze a country’s economy.

Another issue worth noting is that once a growing number of financial companies start to use Libra in their transactions, more financial assets will be priced in terms of Libra. It is not hard to imagine that, when the world’s economic and financial systems face fluctuations, major countries around the world may require Libra to adjust the rules of Libra’s circulation and transactions in order to expand or shrink the cryptocurrency’s issuance. The Libra association would, in this case, become a super central bank with its own independent monetary policy, and Libra would become an independent currency. Central banks worldwide are well aware that Libra has this potential. 

Suppose the Libra Association and Libra run like a central bank and an independent currency. Who will determinate a monetary policy? What will the goal of this monetary policy be? Which country’s or region’s economic situation will be Libra’s reference? 

There are two fields in which Libra has the most potential for success. The first is in countries with fragile economies, where the people do not believe in their currencies. People in such countries may rather use Libra to save and as a measurement of value. Libra is expected to become a daily-use currency in these countries.

On the contrary, in developed regions such as the EU and the US, Libra is unlikely to replace existing currencies. This is down to the fact that Libra does not represent an equivalent domestic currency, and will create issues for users who are confident in, and refer to, the value of the currency regulated by their own central banks.

The second field that Libra will likely see success in is cross-border transactions. Libra has found a way out of the current complexity of such transactions via the convenience of the internet. For this reason, many financial companies have filed requests to join the Libra Association. In this sense, Libra is expected to have an edge in pushing forward economic and financial globalization.

As the birth of super-sovereign currencies is at this point inevitable, China should take advantage of WeChat Pay and Alipay, among other technological innovations, to increase the cross-border use of the yuan and accelerate the yuan’s internationalization. The nation should also take an active role in the operation and management of Libra, to establish a foothold in the future international currency battlefield.

China should stick to the principle that Libra is not allowed to be used in domestic trade so as to maintain sovereign currencies‘ unrivalled positions.

Chinese regulatory authorities should also declare in advance that cross-border trade of Libra can be limited in emergencies, in order to prevent capital flight and economic crises. 

In addition, as a great power, China must consider permitting its major firms to join Libra’s governing body. Instead of rejecting Libra’s potential, China might as well join it and participate in its rule setting. 

There is a small chance that Libra will evolve into a new currency similar to the IMF’s Special Drawing Rights (SDR). Since China has taken an active role in IMF and SDR operations, why can’t it join Libra’s governing body? They are essentially the same. 

On top of that, China has supersized social networking and e-commerce platforms, which should be encouraged to push for their own digital payment tools as part of their internationalization drive, so as to increase the yuan’s clout in international trade. It is only once the home currency is strong enough that the nation will be capable of getting involved in the future issuance of international currencies. 

China should be sober-minded and realize that the yuan, however globalized it becomes, will remain the sovereign currency, while the creation of super-sovereign currencies is inevitable. The odds are low that China’s local financial institutions and businesses will launch super-sovereign currencies, taking into account restraints on online transactions and cross-border trade. Therefore, China ought to cope with super-sovereign currencies in an active and pragmatic manner, amid its push for the yuan’s internationalization.

The author is director of the Academic Center for the Chinese Economic Practice and Thinking (ACCEPT) at Tsinghua University and chief economist at the New Development Bank.

Beyond participating in the Libra, China now also wants to introduce its own digital currency. About the new Chinese digital currency the South China Morning Post, which belongs to Alibaba, a participant of China´s new digital currency reveals the following facts:

„China is the first major economy to explore launching its own digital currency and established a PBOC-backed research institute to study the field in 2016.

Despite notching up dozens of patents over the past five years, China’s central bank disclosed little about the technology or design underpinning its coin until Facebook announced plans to launch a new digital currency named Libra in June, a move that sent shock waves through central banks and financial institutions the world over.

Mu Changchun, the PBOC official who oversees research into digital currency, said last month China’s proposed digital token would have same legitimacy as yuan banknotes and, in time, replace them to a large extent.

The coin would be tightly controlled by the government rather than built on “pure blockchain” technology, a decentralised system that underlies cryptocurrencies like bitcoin and does not require administration from a central authority.

The PBOC plans to make the coins available through four state-owned banks, as well as online payment platforms operated by tech giants Tencent, China UnionPay and Ant Financial, a unit of Alibaba, which owns the South China Morning Post.

It would primarily be used for online retail transactions, officials said, but many analysts say Beijing’s goal is to accelerate the yuan’s use internationally and counter the challenge from cryptocurrencies like bitcoin.

“It would help promote yuan internationalisation for cross-border payments,” said Alicia Garcia-Herrero, Natixis’ chief economist for Asia-Pacific region.

Beijing’s plan to make the yuan a major international currency has stalled in recent years, with its share of international payments falling and use in currency transactions rising only slightly.

In response, China is banking on a digital version of the yuan to boost its use internationally.

State-run newspaper China Daily has reported “closed-loop testing” of the digital currency has already begun to simulate payment scenarios with “some commercial and non-government institutions.”

The PBOC started a pilot research and development project for the digital currency in Shenzhen, which was later expanded to include Hong Kong, the main yuan offshore trading centre.

Beijing has goals to make Shenzhen, a hi-tech hub home to Huawei and Tencent, a model global city in the coming decades.

China already has a well-developed mobile payment system through Alibaba’s Alipay and Tencent’s WeChat Pay that would be natural conduits for a digital currency.

In addition, China UnionPay, the country’s largest credit card company, has been testing the feasibility of the sovereign digital currency on its platforms for retail purchases, corporate banking and cross-border financial payments, the company’s director Chai Hongfeng said last week.

Shen Jianguang, deputy head of the Moganshan Research Institute and a former economist at the European Central Bank, said China was well positioned to be a world leader in digital currency.

“The digital currency will be an area where [China] can overtake others,” he told a forum on Friday.

Shen said although China’s intention was to compete with other cryptocurrencies and central banks, international promotion of the yuan through a digital currency would not change the country’s long-standing concerns over excess capital outflows.

Facebook’s Libra – a “stablecoin” cryptocurrency whose value is tied to a basket of currencies to limit price volatility – could pose a big test for the digital yuan’s use internationally, since China maintains strict capital controls and now bans domestic internet access to both Google and Facebook.

Beijing has long been suspicious that Libra would extend the US dollar’s dominance in international payments.

US dollar assets would make up 50 per cent of weighting in the basket of currencies used to underpin Libra’s value, compared to 18 per cent for the euro, 14 per cent for the Japanese yen, 11 per cent for the British pound and seven per cent for the Singapore dollar, according to a report in the German magazine Der Spiegel this week. The Chinese yuan would not be included.

In addition, American businesses account for a majority of the 28 founding members of the Libra Association, the consortium that will back the cryptocurrency.

And what about Europe and Russia?

As I see Russia’s economy will be more the model of a resource empire and manufacturer of some upgraded products and doesn’t want to copy the Asian model of cheap mass production for the West.But maybe Russia underestimates the driving productive forces of digitalization in form of industry 4.0 and digital currency. The Bitcoin cannot be seen as alternative to existing currencies and is more a speculation gadget and toy . But Libra and the question of digital currency are different.China says No to Bitcoin,but Yes to digital currency and blockchain technology.China has just passed a new digital currency law.I guess that Russia-different from China- doesn‘ t want and cannot become an international financial power and the Rubel never can replace the US-$ as world currency. However the introduction of the Libra and China’s digital currency will have effects on the Euro and the Rubel as well as on the international financial system.It is the next logical step of neoliberalism as described in the writings of Hayek about currency competition which he wants to privatize from the central banks.In Germany the discussion about digital currencies just started. There are now many articles about digital currencies as of Jesús Fernández-Villaverde, Professor of Economics, University of Pennsylvani who sees neoliberalist Hayek as ingenoious avantgardist for crypto currencies:

„In 1976, Friedrich Hayek published a short pamphlet, The Denationalization of Money. Worried that political constraints in developed countries prevented central banks from tackling the high inflation at that time, he argued that money-issuing should be opened to market forces, and the government monopoly on the provision of means of exchange should be abolished. Hayek envisioned a system of private monies in which the forces of competition would induce banks to provide a stable means of exchange (Hayek 1999). Despite some attention (e.g. Salin 1984), for decades Hayek’s proposal was considered more a curiosity than a workable idea.

Technological developments over the last few years have made Hayek’s proposal a reality. This is the result of many individual decisions, rather than the outcome of a planned policy change (a process that Hayek would have appreciated). Nowadays it is straightforward to create privately issued money as a cryptocurrency. Thanks to fascinating advances in cryptography and computer science, cryptocurrencies are robust to over-issuing, the double-spending problem, and counterfeiting (Narayanan et al. 2016). Cryptocurrencies are different from the notes issued by financial institutions during times of free banking (Dowd 1992) for three reasons:

  • Most cryptocurrencies are fully fiduciary. Notes in the free banking era usually represented claims against deposits in gold or other assets.
  • Cryptocurrencies are not directly related to credit. They are issued by computer networks.
  • Cryptocurrencies such as Ethereum can also work as a sophisticated automatic escrow account. It is effortless to add to the code a condition that states: “Peter will pay Mary 10 ethereum if, tomorrow at noon, the temperature in Philadelphia according to is above 80 degrees.” Once that code is in place, the verification of the condition and the payment, if the condition is satisfied, would automatically be implemented.“

There is an important lesson here: the threat of competition from private monies imposes market discipline on any government that issues currency. If a central bank, for example, does not provide a sufficiently ‘good’ money, then it will have difficulties in implementing allocations. This may be the best feature of cryptocurrencies. In a world in which we can switch to Bitcoin or Ethereum, central banks need to provide, paraphrasing Adam Smith, a tolerable administration of money. Currency competition may have a large upside for human welfare after all.“

Digital currencies as the next logical step of neoliberalism,. The last experiment brought us the financial crisis 2008, now more and more fanatics are hyping the crypto currencies. However I think that China will manage this issue better than the USA with Libra. But we will have this discussion next time in Germany and Europe with its fragile Euro . And due to the zero rate-policy or negative rate policy of the ECB and the state intervention in credit the neoliberals will have some arguments to let the market decide the credit lines and that private currencies could be a better allocator of resources and credit than the central banks or the ECB. On the one side you have the technological option for that as the production forces generate these opportunities as Marx foresee, on the other side it still is a political decision. And as more and more people question the role and reliabilty of politics as a market force and guarantator of financial stability, the neoliberals may prevail that private digital currency and a market competition should decide instead of the state and the central banks. Questions of the stability of the national and international financial system are then ignored in this debate or labeled as backward thinking and anti-modern, etatist and nationalistic thinking.

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