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Digital Yuan and Its Relation To Libra: What is the Future of Digital Currency?

Five years in the making, an official Chinese digital currency for the yuan is being tested and so the future seems very close.

This is a unique kind of fiat currency and it will be launched by one of the world’s largest economies in China, inevitably changing the way we look at digital currency and its potential impact on the global economy. 

The Idea Behind Facebook’s Libra

The conversation about mass adoption of a digital currency first gained traction in June 2019 when Facebook Inc. announced its blockchain-based Libra token. Facebook CEO Mark Zuckerberg made a promise that Libra would not be launched until it had obtained approval from United States financial regulators. However, when he testified before the House Financial Services Committee on October 23, 2019, it was clear that regulators were not prepared to classify Libra as a security token and regulate it as such.

While officials in Europe and the US are worried about privacy and the way Facebook handles the financial data of its users, there is bigger concern related to the launch of a privately controlled financial system. European regulators expressed fears that Libra could become a systemic threat to the global financial system and rival national banks. At the same time, any cryptocurrency poses a risk of users exploiting it to evade global sanctions or launder money. But, unlike existing cryptocurrencies like Bitcoin, Libra has a central authority and it’s not clear how the Libra Association will handle such responsibility. 

Even though the initial plan was for Libra to launch in 2020, there is little chance regulators will give their approval that soon. Especially during a U.S. election year, there could be risks associated with such an event and how it can affect the election process. Work still continues for the Libra Association: in April their whitepaper was updated and new members such as Temasek, Singapore’s government-owned investment vehicle, San Francisco-based crypto investment company Paradigm Fund and private equity firm Slow Ventures joined the association. The Swiss Financial Market Supervisory Authority (FINMA) has also confirmed that it received an application for a payment system licence from the Geneva-based association governing Facebook’s planned cryptocurrency. These announcements indicate that Libra is still in the process of obtaining and maintaining legal compliance and entering the existing financial ecosystem.

Why Libra is a Threat to DCEP

On May 5th, a speech was delivered by Li Lihui, a former Bank of China president who now leads the blockchain research group at the National Internet Finance Association of China, that everyone expected to be mostly about DCEP, the Digital Currency Electronic Payment, or the digital yuan. However, Li spent a lot of time discussing Libra and its potential. His passionate attitude towards the project demonstrates that while regulatory bodies in the U.S. see digital currency controlled by an organization as a threat to the existing financial ecosystem, it could potentially help America retain its global monetary dominance. 

According to “Discussing Digital Currency with Leading Officials,” a book that was published by China’s Central Party School, Libra is a good example of public-private partnership and has the potential to become adopted as an international currency. “China originally relied on mobile payment to get ahead, but now Libra has the potential to change the game again,” Hongzhang Wang, one of the authors of the book’s preface said to Chinese media outlet Sina.com. “We can’t deal with new risks by discouraging technological developments. This would allow U.S. companies to build a digital currency system through blockchain technology, which could threaten or even surpass Alipay or WeChat Pay.” Because Libra’s value will be primarily backed by USD, the token could lessen the international influence of the Chinese yuan and, therefore, poses a threat to its plans.

While Libra has a complicated basket of fiat-backed stablecoins, DCEP is designed as simply digital cash. The head of the People’s Bank of China’s (PBOC) digital currency research subsidiary, Changchun Mu, said that the currency will not need a basket to maintain a stable value. “The currency is not used for speculation. The RMB is used to spend, not for speculation. It does not have the characteristics of bitcoin speculation, nor does it require the currency basket assets to support the value of the currency like stable currency,” he said, as reported by Shanghai Securities News.

Is Cross-Border Adoption the Goal of Digital Yuan?

The purpose of DCEP is focused on replacing physical cash and creating a new medium for cross-border payments. Chinese consumers have already embraced mobile payment applications, so the transition to digital yuan will be easy. Experts believe that the token will work with a number of Chinese banking apps as well as joining WeChat Pay and AliPay services. Since this is the first digital currency that will be controlled by the government, it has the potential of becoming accepted as digital cash worldwide and challenging the dollar in the process. 

The race to the finish line just began, therefore, there haven’t yet been clear plans announced for the use of DCEP globally. However, if successfully implemented, it might move the world financial markets away from the dollar-centric system. With China being the largest exporter, it is likely that usage of the digital yuan will be encouraged for its trading with the Belt and Road Initiative partners. Because the dollar based system is in use worldwide, this change will affect all economies, big or small.

Will DCEP and Existing Digital Currencies Co-Exist?

The unveiling of plans for centralized digital currencies, such as Facebook’s Libra and China’s Digital Currency Electronic Payment, made waves around the crypto community. Traders and adopters of existing crypto coins most often favor decentralized privacy-oriented systems. The existence of an international payment system which is designed and controlled by a large corporation or one of the most populous countries in the world can pose a threat to the current cryptocurrency industry. Decentralized exchanges are growing in popularity as more users prioritize their privacy which is opposite to the idea of centralized digital currencies. 

Back in October 2019, when China’s President Xi Jinping called for the country to accelerate its adoption of blockchain technologies, it was very clear that this wasn’t necessarily good news for cryptocurrency, especially Bitcoin. Authorities in the country already banned ICOs and cryptocurrency exchanges in 2017 and there have been reports of a ban on cryptocurrency mining being in the works. This does not only hurt the BTC adoption rate but also means that the vast majority of cryptocurrencies will not be able to compete. If plans for the widespread adoption of DCEP or Libra are fulfilled, the existing cryptocurrency exchanges with a large number of currency pairs offered, like HitBTC with its exemplary 800 pairs, will have a dilemma on their hands of whether it is possible to stay true to their mission. Otherwise, they will have to change their politics and their services to accommodate centralized digital currencies that are used globally. 

The Beginning of the future

While there is no official timeframe for the implementation of the digital yuan, trials are already beginning in four urban areas with a combined population of more than 38 million people. The central bank’s digital currency will not be issued en masse to avoid inflation, but instead will be implemented in certain branches at each stage of testing and modified according to its performance along the way. First, the digital money will be issued to commercial banks and other operators. Then local government employees will receive part of their transportation subsidies in digital currency. In addition, some retailers, including McDonald’s and Subway, have reportedly been invited to trial the digital yuan in the Xiong’an New Area. 

The potential effect of central bank digital currencies (CBDCs) sparked interest in other national banks as well. They can also serve as a way of advancing cashless payments which have become even more important during the current health crisis. In April, the central bank of France has called for applications with a CBDC for interbank settlements, and the Bank of England (BoE) has published a discussion paper “Central Bank Digital Currency: Opportunities, Challenges and Design” to “begin a dialogue on the appropriate design of a CBDC and an evaluation of whether the benefits of CBDCs outweigh the risks”. It is hard to predict how soon this new technology could be implemented on a larger national scale but it is certain that the landscape of cryptocurrency is slowly changing. Seems like it is only a matter of time before the mass adoption of CBDCs makes the argument for decentralization obsolete. 

Adam Stieb
Adam Stieb
Crypto enthusiast and professional trader. Adam received an education in IT and communications and got into cryptocurrency as a result of his trust in its ability to restructure the global financial market and replace fiat money. Adam’s goal is to spread knowledge about the cryptocurrency market, trading and investing.