China released a bit more information around its much-awaited digital yuan. And it seems that there will be a race between the two.
The new information came from Li Lihui, a former Bank of China president who now heads up the blockchain research group at the National Internet Finance Association of China. The talk was entitled “Digital Currency: A Possibility to Restructure the Global Monetary System”.
While one would have expected the speech to focus solely on the digital yuan (aka DCEP, the Digital Currency Electronic Payment) Li spent at least as much time discussing, in a fairly laudatory way, Libra.
Li began his Libra remarks by describing it as “supranational digital currency”. By that, he meant a digital currency created not by a country, but by a large, credible organization. This sort of currency is designed to replace existing financial intermediaries such as commercial banks and even central banks to some extent.
As an avid follower of Libra’s development, Li spoke enthusiastically about Libra’s updated white paper. Specifically, he concurred that Libra made impressive progress on strengthening “USD’s dominance,” and “financial compliance standards.”
The big picture
So what are we to make of these remarks? It’s ironic that even though Libra is struggling to gain approval in the US, outside the US it’s generally seen as America’s best weapon to continue its global monetary dominance. Behind Li’s compliment is China’s growing fear that Libra will become its main competitor in the nascent field of digital currencies, despite the two having major design differences.
China has a dilemma that brings it directly into conflict with Facebook: It wants its DCEP to be used internationally, for cross-border payments. Yes, overtly, the government is advocating for the digital currency as a more efficient way to get rid of paper cash in country, cut down on fraud and do all sorts of other things. But the real prize here is creating a global digital currency that replaces the dollar.
The worst part of it is, Facebook doesn’t really need China. Libra is aimed at small and medium-sized businesses and since Facebook isn’t even legal in country, there’s no real addressable market. But if China doesn’t participate, it risks becoming isolated from a new, growing global market.
Libra versus the digital yuan
Compared to Libra’s complicated basket of fiat-backed, multiple-stablecoins design, DCEP is simply digital cash.
Yet despite the design differences, both parties love to play politics and publicly denounce each other as a threat to their own country’s position. Mark Zuckerberg was particularly skilled at this when he made the case that if the US doesn’t catch up and create a digital currency, China’s digital yuan will usurp the dollar and achieve currency supremacy.
That would be quite a turn around since China’s yuan only makes up just 2% of global payments and reserves, whereas nearly 90% of international transactions were in U.S. dollars in 2019.
China has been dominating the field of digital currency since 2015, and suddenly, Libra comes along and wants a piece of the pie. Worse yet, Libra will be primarily backed by USD.
Who will win
The fact that the dollar sits at the core of Libra disturbs China, greatly. If successful, Facebook’s global footprint, Libra’s upgraded compliance standard, and its connection with commercial banks will significantly inhibit the RMB’s use beyond China. In fact, the worst nightmare for China is if Libra gains traction and does not include the RMB as a currency in its basket, which would significantly hinder the RMB’s internationalization.
However, establishing a new global norm isn’t going to happen overnight. China has to be the leader in the digital currency sphere because the tech provides a perfect second chance for China to gain global dominance. DCEP can be used for its One Belt One Road initiative, its infrastructural projects in Africa, and foreign aids to developing countries. If code is law, China is attempting to use the digital yuan to codify a new global norm, written by China.