Should we be afraid of China's crypto plans?

In the world of digital currencies, bitcoin still attracts all the attention. However, behind the scenes, some central banks are working on a crypto variant of their own currency. China is well ahead of the rest of the world in this regard.

Bitcoin has definitely been stealing the show in the financial world lately. The digital currency rose above the $2018 mark for the first time since early 12.000 this week. Much like the gold price rally, much of the bitcoin boom is due to dollar weakness.

The US currency is under pressure, as more and more parties are concerned about the rapidly growing government debt and the very accommodative policy of the central bank. By exchanging dollars for other hard currencies, gold and possibly also bitcoins, they anticipate that dollar purchasing power may be undermined in the future by rising inflation.

The future is digital
It is difficult to predict what inflation will do in the future. On the other hand, there is a very good chance that in a few years' time, the digital currencies of central banks will attract more attention than cryptocurrencies such as bitcoin. For a central bank, there are some major advantages to issuing a digital version of its own currency.

It then becomes much easier to follow payment traffic than with cash transactions. A digital currency also fits in well with an economy that increasingly takes place in the digital world. Finally, it also becomes a lot easier to directly influence the economy.

Banks offside
During the corona pandemic, the central banks tried to take all kinds of measures to ensure that banks opened the credit tap further, so that the economy continued to run as smoothly as possible. How easy is it if companies or even the inhabitants of a country had their own account with the central bank? An amount can then be deposited directly into this if the economy needs a boost.

In the western world this is unthinkable for the time being. If banks are sidelined in one fell swoop, it undermines the entire banking system and potentially leads to a financial crisis. It is also questionable whether such a move is possible within the existing legislation. In China it is different.

In control
The Communist Party is firmly in control and all the major banks are state-owned. A digital currency allows President Xi Jinping to take more control of the economy. It is therefore no wonder that China is leading the way in developing its own crypto currency.

Earlier this year, it was announced that the Bank of China has filed for as many as 84 patents related to digital currencies. It also became clear this week that a small test with the digital renminbi is being scaled up to major cities such as Beijing, Shanghai and Hong Kong.

Despite the ambitions, it is unlikely that these initiatives will give the renminbi a greater role on the global stage of currency trading. Only 2% of all foreign exchange reserves are held in the Chinese currency. The only party that can undermine the dollar's dominant position for the time being is the United States itself.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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