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Crypto-Investing: The Most Promising Central Bank Digital Currency

By Alexander BorodichCryptocurrencyJun 20, 2021 09:33AM ET
Crypto-Investing: The Most Promising Central Bank Digital Currency
By Alexander Borodich   |  Jun 20, 2021 09:33AM ET
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There is an ancient expression by the Chinese philosopher Lao Tzu: "The journey of a thousand miles begins with one step." For the Middle Kingdom, this path was marked back in 2016, when the deputy Governor of the People's Bank of China, Fan Yifei, told Bloomberg that cryptocurrencies are not suitable as a payment instrument due to their constant volatility.

In his opinion, the creation and emission of electronic currency can solve the issues of blockchain technology scaling, industry regulation and the instability of the crypto market.

How has China come to be at the forefront of the global race to create a digital currency—CBDC—for a country of 1.4 billion people?

Facebook's standoff with China, the European Union and the US Congress

The Chinese authorities have been paying attention to the Facebook (NASDAQ:FB) project, which could change the financial world of the future: the Libra stablecoin was supposed to provide a pool of fiat currencies that did not include the Chinese yuan.

The development of the massive global project began in an atmosphere of total secrecy: more than 50 engineers worked on it in an office with separate access under the leadership of former PayPal Holdings (NASDAQ:PYPL) president David Marcus. The association, at the first stage, included such large structures as Visa (NYSE:V), Mastercard (NYSE:MA) and Ebay (NASDAQ:EBAY).

Serious problems with global regulators began after the announcement of “Libra," dedicated to the integration of cryptocurrency transfers in the WhatsApp, Messenger and Instagram applications. This could provide the future stablecoin of the Internet giant with an audience of over 3 billion people, The New York Times noted.

A major US federal official, Rohit Chopra, in his letter, stressed the need for urgent action by the Federal Reserve (Fed) and the launch of its own payment system in contrast to Facebook.

Speaking to US regulators, Mark Zuckerberg urged Congress that China is very quickly moving towards creating its own digital currency, and Facebook, according to him, can become a convenient payment tool for millions of users who do not have physical access to banking services.

These arguments and references to the People's Republic of China did not help speed up the approval of the project. Moreover, the joint group of the European Union, consisting of the deputy finance ministers of Germany, Italy, France, Spain and the Netherlands, also agreed to prevent the launch of Libra, registered in European jurisdiction, and to increase pressure on other members of the association: Booking (NASDAQ:BKNG), Spotify (NYSE:SPOT) and Uber (NYSE:UBER).

In their view, the EU countries could lose monetary sovereignty in favor of Facebook's corporate interests, and gain only problems in monetary policy.

The tactic of legal barriers has worked: the tech conglomerate's digital currency pilot, after a year of rigorous checks by financial regulators and multiple transformations, will launch only in a limited startup-format in 2021.

China, quite rightly, cautiously watched the strengthening of the US dollar and the Libra project provided by it, which could be accessed by billions of users around the world.

Zhou Xiaochuan, the former head of the People's Bank of China, said that the Facebook project threatens existing payment systems and could weaken the position of the national currency.

Chinese President Xi Jinping, speaking at the 18th Politburo Meeting of the Communist Party Central Committee in 2019, noted that China needs to take a leading position in the field of blockchain and industrial transformation.

When all is said and done, in contrast to Facebook, which has been hit by a regulatory tsunami, a research group within the People's Bank announced that it will soon launch its own two-tier digital currency, issued by the central bank with an extensive network of commercial banks.

In the fall of 2020, the authorities of the Chinese city of Shenzhen organized the first mass testing of the digital yuan through the distribution of so-called “red envelopes.” Users received a small amount of electronic currency with the possibility of using it from local sellers.

By the first quarter of 2021, similar tests were conducted in dozens of cities with millions of people in China.

One of the largest retailers in China announced the start of using an electronic payment system to pay salaries in the digital yuan, and the head of the monetary policy department of the People's Bank officially confirmed the use of the digital currency at the upcoming Winter Olympics in 2022.

According to the developers, the new hardware wallet, which supports offline payments without an Internet connection and the use of mobile phones, will also allow older users to switch to digital yuan without problems.

In other words, in a very short period, China has passed the stages of creating a methodology, concept, drafting laws, mass testing and pilot implementation of the digital yuan.

The rivalry with Facebook has only accelerated this irreversible process.

Also, the People's Bank of China has defined the digital yuan as a legal payment that should be accepted throughout the country.

The competition with the digitalization of the West and the rapid creation of all possible analogues is only the first layer of China's official rhetoric, turned inward. This is followed by national and partner interests aimed at expanding the area of potential influence and countering common threats.

For example, the Central Bank of China and the Hong Kong Monetary Authority have already discussed the pilot implementation of the digital yuan for cross-border payments, and the first Deputy Chairman of the Central Bank of Russia, Olga Skorobogatova, said that the agency is developing a digital ruble platform, taking into account the possibility of technical interaction with the digital yuan.

The Central Bank of Russia intends to present a prototype of its own platform by the end of 2021.

According to the regulator's position, the introduction of national digital currencies will allow, among other things, to conduct cross-border transfers without the participation of SWIFT—an interbank system founded in the early 80s and including about 11,000 member banks that process up to $5 trillion in transactions per day.

ECB Chief Christine Lagarde said the European Central Bank “is in no hurry to follow an example of China or Facebook and be the first in its efforts to issue a central bank digital currency."

The digital euro can appear within four years after all regulatory approvals.

Of course, we need to analyze the risks of introducing a digital currency.

1) Given that the issue is carried out by the Central Bank of the country, there is competition with the money of commercial banks, since the obligation of the regulator looks less risky and more of a liquid asset to a wide range of people.

As a result, there is a flow of funds to the CBDC even in the absence of interest accrual on current and deposit accounts. This leads to a reduction in the assets of commercial banks and lending to companies and individuals.

2) When it comes to cross-border transactions, the emergence of CBDCs can lead to easing in transaction costs for currency conversion and capital inflows, which can be a real problem for countries with consistently low inflation.

3) Also, do not miss the point that the rejection of cash can happen quite naturally. For example, the share of non-cash payments in Russia may exceed 90% by 2024-2025, predicts the general director of the Visa payment system in Russia, Mikhail Berner.

The point of no return has already been passed: the piloting stage will certainly be followed by mass implementation. It will be possible to exchange one electronic currency for another: digital yuan for digital ruble, dollar, euro, dinar or dirham.

I do believe that digital currencies are the future of the world's financial system: they cannot be forged, stolen, or spent on another service or product. Full transparency and no corruption. The upcoming always seems better than the present.

Sources:,, Financial Times,, RBK,

Crypto-Investing: The Most Promising Central Bank Digital Currency

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