The dollar is, in many ways, America's most powerful weapon. Currently, the U.S. dollar underpins at least half of the world's international trade, five times the U.S. share of world trade and global banking, but sanctions are becoming more common, and the damage caused by denying access to American financial systems is becoming more punishing. These practices are punching holes in the image of the dollar as a safe, stable reserve currency to use in trade. As the Trump Administration continues to show its preference for this form of international control, other countries are starting to think using the dollar isn't such a good idea. The newest threat to the dollar on the horizon is Chinese digital currency.
China has been moving away from paper money for years now. "Everything is immensely convenient," Martin Chorzempa, a research fellow at the Peterson Institute for International Economics said of life in China. "You pretty much only need these two apps to do just about anything. You walk into a restaurant, scan a code and order your food. You don't have to wait for a waiter. All the payments are automatic. It's quite extraordinary."
China is definitely far ahead of the U.S. when it comes to digital currency: hundreds of millions of Chinese consumers no longer using paper money at all opting to use apps like WeChat (OTC: TCEHY) and Alipay (NYSE: BABA) instead. China's lead was established in large part because of a head start: when tech companies like Amazon (NASDAQ: AMZN) and Facebook (NASDAQ: FB) came to China, a country without the widespread credit card use of America, there was a question as to how consumers would pay through the platform. Because of this, the country had reason to begin developing digital currency years before it was a major factor in U.S. markets.
With Chinese tech companies paving the way, digital currency use flourished in China, and now the Chinese central bank wants in on the digital action as well. China's digital yuan will be a centrally controlled cryptocurrency, but it won't function the same way as Bitcoin. Instead, it's value will be tied directly to the regular yuan making it much more stable. However, every transaction will be monitored by the central bank, so it will lack Bitcoin's anonymity.
"Actually, the term that the central bank officials in China have used is 'controllable anonymity,' which is one of the most Orwellian statements one could think about," Chorzempa said.
The central bank has been developing a digital yuan for six year, but Facebook's announcement about six months ago that they will be releasing their own digital currency kicked the bank into high gear. They want to get the digital yuan rolled out in time to be competitive with Facebook's currency, Libra.
"China relies on the mobile payments sector immensely... Libra represents a huge threat on mobile payments," said Chuanwei Zou, chief economist at Bitmain. Chinese company Bitmain sells equipment used to create or "mine" cryptocurrencies.
Cryptocurrency arguably represents the next big shift in financial development, and China and the U.S. are in a race to create their own digital currency first. When China rolls out the digital yuan, they will undoubtedly be in a better position to come for the dollar's spot as the world's top currency. However, considering how deeply entrenched the dollar is in international trade and trade in general, it's unlikely that a digital yuan will change the demand for the U.S. dollar for some time to come.