China’s digital currency could be a response to Libra

Earlier this month, a senior official of the People Bank of China (PBoC) announced that the country was ready to launch its digital currency. The announcement was made at a China Finance 40 (CF40) group discussion and it was revealed that China has been working on this for the past five years.

China CBDC

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The obvious reason for this announcement would be the US-China trade war. The last year has seen the two mighty economies deal blows to each other. This has possibly triggered a global economic slowdown, as data from different countries across the world trickle in.

We know that China hasnot been fond of Cryptos. Before getting into the macro aspects of China’s CBDC (Central Bank Digital Currency), let us quickly go through some of the salient points of the digital currency.

  • The currency would have two tiers. The PBoC will be at the top tier with commercial banks forming Tier 2. This is to ensure effective management of the entire market.
  • The CBDC will have a Blockchain element, however, is not entirely built on it. This is to ensure throughput required by the China market is achieved.
  • The usage pattern targeted for use of the currency is “small scale high frequency” businesses.
  • PBoC have filed about 52 patents for the digital currency.

Many countries are looking at a CBDC. Singapore has even conducted pilot transactions with Canada with their digital currency. However, I feel, there are a few macro reasons at play with the China announcement.

In my view, the US-China trade war is undoubtedly behind this announcement. Earlier this month, China’s Yuan fell below the $7 mark for the first time since 2008. The Trump administration have been complaining that China has been manipulating its currency. The currency has fallen in value by over 2.5% since the end of July.

Analysts following the Yuan in the context of the trade war feel that the battle between the two economies is now moving into the FX market. In that context, and in post-Libra announcement times, China’s CBDC is extra important. The expectation is that the digital currency could help increase the global circulation of the Yuan.

Also, China has always wanted to find a way to keep its currency unaffected by foreign technology firms. The former governor of PBoC, Zhou Xiaochuan, last month mentioned that Libra could pose a serious risk to national currencies. Also, Libra’s reserves are largely going to be in the USD. So it could be an tool for the US to gain a monetary foothold in China.

The strength of a state is greater than that of an Internet company

Ren Zhengfei, CEO of Huawei

Another voice that has come out to support China’s CBDC is Ren Zhengfei, the CEO of Huawei. He commented last month that China has the might to respond to Libra with a digital currency. With the trade war taking new proportions, it is no surprise that China are responding to inputs from local experts.

With such reactions from China, I would be surprised if the US created too many hurdles for the Libra launch.

We are yet to see how the landscape of digital currencies is going to pan out over the next few years. But it is interesting to see that the concept is being considered as a potential weapon in a trade war. Satoshi may not have wanted such a centralised version of a digital currency, but this is a sure shot way to get it (Blockchain) main stream.

Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on Inclusion and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

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