President Biden has one key challenge in his presidency: China. Yes, everything is going to come around China as China opens a playbook to “overtake” US economically, and disintermediate the US dollars. China is creating a digital Yuan, and if that happens, and it reduces transactional friction in commerce, China can scale that mission through its global sovereign lending apparatus.
China has begun the third round of its digital currency testing. The exercise took off on January 20, in Shenzhen, as part of a larger scheme to introduce the E-Yuan in mainland China. As part of the project, a total of 20 million digital yuan will be issued to residents of the local Longhua District.
Pandaily reported that up to 100,000 so-called “red envelopes”, each with an amount of 200 yuan, will be given out to those who have purchased social insurance from the commercial entities they work for and intend to stay in the jurisdiction for the upcoming lunar new year holiday.
While dislodging the US dollars may not happen in North America and Europe easily, Africa and Latin America could easily fall into place, faster. And if that happens, you could see a new equilibrium on currency emerge.
Sure, people do argue that China cannot assume that position due to its recent history. Possibly, but we need to understand one thing: technology reduces the trust burden by making it easier for demand and supply to attain new equilibrium faster through removal of information asymmetry.
A digital yuan will do what Uber did on our fears (allowing strangers to give us rides), and Airbnb did on grandma’s warning (comfortably sleeping in a stranger’s house). So, while the analog Yuan may not have been trusted, the digital yuan can tap into the pervasive digital trust-enhancing systems to elevate its acceptability in global commerce.
So, as we thank Mr. Biden for taking Nigeria out of that dreaded 13-nation “ban” list which his predecessor lumped Nigeria alongside Yemen and Somali, he has work to do to keep his national currency the default for global commerce.
For Nigeria, I have long maintained that if we move fast, we can make Lagos the epicenter of the new (digital) currency in Africa. The opportunity remains for that. We need to watch both frontal and flank attacks from mid-size and smaller nations like Rwanda and their positioning on this. The US has largely not bothered on the potential dislocation from cryptocurrency but the fact remains that Bitcon may not be its challenge, rather e-yuan may be the real threat to the US dollars.
Jerome Powell, the U.S Fed Reserve Chairman, spoke on Bitcoin and cryptocurrency, among others. Here are excerpts. The full video below.
“Since we are the world’s reserve currency, we actually think we need to get this right, and we don’t feel an urge or need to be first,” he said. “We effectively already have a first-mover advantage, because we’re the reserve currency.”
“We’ve been very focused… on potential regulatory answers for global stablecoins, in particular,” said Powell in response to a question about CBDCs, or central bank digital currencies.
“So that’s been a high-level focus, and that will continue to be a high-level focus because they could become systemically important overnight and we don’t begin to have, you know, our arms around the potential risks and how to manage those risks, and the public will expect we do and has every right to expect that… It’s a very high priority.”
Comment #1: Prof. Bitcoin is a liquidity blackhole; and every enlighten government is aware of the inherent threats it poses to her hegemony of its economy. China is not the first to go this route. Venezuela came up with the Petro (digital fiat) in 2017, but it flopped.
While creating a digital Yuan is one thing, the nature of the currency is another. Will it be inflationary or deflationary; will it have a limited supply, or it will be infinite printing like the traditional fiat of every nation state is today.
Digitization of fiat currencies by any sovereign state is, for me, an attempt to compete with Bitcoin or other digital protocols and assets like Ethereum. The missing pieces are decentralization, trust, freedom and perception.
Bacause a sovereign state is always susceptible to the financial priest, governments, politicians, and most of all, inflation; I don’t see the people adopting any of her copycat digital currency for long, as these are the antithesis of, e.g. Bitcoin.
As more of these smart contract platforms continues to scale in usage, economic bandwidth and more technological advancements like we’re witnessing with the rise of DeFi on Ethereum, the digital Yuan or any similar nation state currency, will be dead on arrival.
My Response: I am not sure we can compare Venezuela with China in anyway. Unlike the South American nation, China has leverages at global level: it is the world’s factory. If China digitizes Yuan, buyers from China will save between 10-15% lost via USD intermediation. Doing that is not rocket science: have fintech and banks (OPay, Flutterwave, GTBank) as agents where people can use Naira to get E-Yuan with wallet credited. Go to Alibaba website and pay Chinese merchants (who will not list on Yuan, not USD) directly. Because transactions are cleared in Beijing, USD goes. It does not need to be decentralized at origination but it needs agents to work.
China is on the 3rd trial after the 1st and second trials went fine. E-Yuan is not crypto, it is avoiding clearing global transactions from New York and London via wallets maintained in Beijing. The deal is eliminating inter-border frictions but warehoused in China. People will use it to save 15% on cost. Visit NAU Awka, Igbo traders are learning Chinese in the Confucius school to help them cut-out merchants in China and buy directly from factory who typically speak only Mandarin. Tell those men by removing USD, they can save more, you will be surprised.
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