China's Digital Currency Could Challenge Bitcoin and Even the Dollar

China has always been one step ahead in digitalizing the day to day activities  - one such activity is going about and shopping with an Alipay or WeChat Pay mobile app in Shanghai or Beijing which is simpler than carrying a wallet loaded with yuan bills. China is eager to carry out its highly game-changing digital yuan, paves the market in the production of digital currencies like bitcoin champion. 

Some analysts think that digital yuan could boost the power of the government over the financial sector and maybe even change the global economic influence balance one day. However, governments worldwide are struggling to keep pace with the latest nature of money, launched bitcoin a little over a decade ago and turbo-charged by Facebook just last year

China's virtual cash is supposed to be an electronic equivalent of currency notes, or coins: the catch here is that this digital currency stays in your digital wallet and not in a physical wallet. Its value is mostly state supported. However, virtual cash would be cheaper and simpler to use than tangible money - and the Chinese government would also provide a degree of control over physical money that would never be feasible.

The program took place in April, with a selective rollout in the towns of Shenzhen, Suzhou, Chengdu, and Xiong'an- planned by President Xi Jinping. Local press has confirmed that some of the money in Suzhou was circulated as transportation subsidies paid to citizens.

Key Takeaways

The key advantages would be to the replacement of fiat cash with a traceable digital cash layer, to inject another layer of data into the formidable data machine that empowers both government monitoring and the domestic machine learning sector - and to provide ample 'credible' decentralization to allow the RMB to pursue its digital upswing towards stronger internationalization and perhaps challenge the USD.

One thing official need to be vigilant about is that the digital currency does not begin to drown out other types of money, including bank deposits. Banks need such deposits to lend to borrowers as credit. Also, the program will theoretically compete with two of China's most influential tech companies, Alibaba Group Holding Ltd., and Tencent Holdings Ltd., backed respectively by Alipay and WeChat.

Is there a threat?

Although digital currency is possibly generations away from a national release, China's actions have sparked alarm about a new challenge to US financial supremacy. Researchers suggest that the renminbi's digital version, as China's currency is officially called, could potentially allow Iran and others to circumvent U.S. sanctions easily or transfer money without the U.S. government noticing it. This can take place as it could be very much possible to move the digital currency across borders without navigating via international dollar-based payment systems.

Facebook's Libra Association, a community established by the social media giant to handle the digital currency announced updated proposals in April that they will launch separate coins backed by individual fiat currencies like the dollar and the euro. With all the events and challenges taking place, some currency analysts have started to doubt whether the dollar will retain its position as the leading reserve currency in the world.

When a national rollout starts, things could start moving fast. According to UBS Group AG, more than 80% of China's mobile users typically pay for purchases via their smartphones, the highest rate in the world. And Chinese customers are willing adopters of enticing new financial technologies. Since its launch in 2013, one money market fund offered through Alipay, Yu'E Bao, became so popular that it was at one point the biggest money fund globally. It emptied so much, so fast, from the bank deposit system in the country that the central bank stepped in to limit it in 2017. One of its key measures will be if Chinese users are convinced of the latest cash technology and the force behind all this.