2021 JULY
DIGITAL CURRENCY
&
ITS THREATS
Written by : Andrew Sia
Introduction
There are over 2,000 cryptocurrencies, tokens, and blockchain instruments commonly traded on more than 250 platforms around the world today. Some of these currencies are created by pseudonymous individuals such as Bitcoin’s Satoshi Nakamoto, some with ideas conceived by prodigies, startups, large tech companies, or even governments. They have been very controversy but have never been taken seriously until lately when we learned that China is getting seriously into this as they are starting to control the two of the biggest tech companies in China—Alibaba and Tencent.
Money is already virtual if you consider credit cards and payment apps where the dollar bills and coins don’t change hand. These are ways to move money electronically.
Bitcoin has been in existence and in use since 2009. It is existed outside the traditional global financial systems and it is not the legal tender like the cash issued by governments. This is known as the cryptocurrency and it is the potential digital currency for the future. Now we will try to explore this subject and come to know more about it.
China’s Ambition
China has created a digital currency, controlled by its central bank, which will issue the new electronic money to monitor its economy and its people. This digital yuan will know the user, unlike the bitcoin. It will want to position its digital yuan for international use and untether the global financial system where the US dollar is the leading currency.
China is embracing digitization in many forms, in this case it is including money, and to gain more centralized control while getting a head start on technologies of the future. China is talking about their currency sovereignty and legal currency status in this respect. China, the authoritarian state and rival of the US is taking the lead to introduce a national digital currency while using the theory of the cryptocurrency and refining it.
This is posing a challenge to the dollar which is used in the international foreign-exchange trades, whereas it is 88% in the latest rankings from the Bank for the International Settlements but the Chinese yuan was only 4%.
Digital currency will make the yuan a rival in bank-to-bank wire transfers, it would provide options for people in poorer countries to transact payment against Chinese companies and individuals. The digital yuan will reside in cyberspace, available on the owner’s mobile phone, or also on a card. It requires the download of a mobile-phone app in the form of the digital cash. This digital yuan will circulate together with cash for some time and eventually the country will digitize all its cash to help them to track spending in real time, and allow them to flag criminal financial activities. This will allow its government to have the tight grasp on its people.
When bitcoin was first launched in 2009, most countries largely played down its significance but it drew China’s attention. Soon China started a study for a possible digital currency in 2014. At the same time a financial-technology revolution was under way in China when the Alipay and WeChat apps making digital payments and cash became mostly unneeded.
But when Facebook announced that it would pursue its own cryptocurrency in mid-2019 and realizing its international user base can dwarf any nation’s population and this technology can upend traditional currencies. The US regulators stopped Facebook. But while the US was curbing Mark Zuckerberg, China was quietly launching its digital yuan in April 2020.
The digital currency’s threat can be taken from the example of the Uber which arrived in every city around the world as a ride-hailing company who put many challenges on the traditional taxi system. It upended the regular flow in our life for the city dwellers and threatened the livelihood of those taxi companies.
Today more than 21,000 banks around the world are doing business with the US dollars and the dollars are used to have the insight of cross-border currency transactions. Its government in Washington has the ability to freeze individuals and institutions by barring banks from doing business with them. The dollar can be used as a “weapon” to weed out any unpleasant elements in the global banking system and has been proven to be very effective. We have seen that it crippled the economy of North Korea and Iran when America put the sanction on them.
The Treasury has a database dealing with any sanctioned individuals and companies—the “Specially Designated Nationals and Blocked Persons Lists” covers virtually every nation on Earth.
Beijing has been expanding very quickly, both in the number of persons and companies, is getting very agitated. Especially due to their latest trampling of the human rights in Hong Kong and the minorities in Xinjiang. Their wolf warrior diplomacy is on their centerstage almost daily.
The use of SWIFT (Society for Worldwide Interbank Finance Telecommunication) in money transfers between commercial banks and this network can be monitored by the US government. The digital yuan can give those who want to exchange hands the money without the knowing of the US government. This is also what China meant by their currency sovereignty and market the yuan internationally.
The digital yuan can undercut the US sanctions and disarmed the dollar as the weapon.
The digital yuan will start to circulate through China’s financial system, and all its six biggest commercial banks are government owned, will distribute digital yuan to smaller banks and app providers like the Alipay and WeChat to control all the sender-recipient transactions.
Beijing has joined an initiative to develop protocols for the cross-border use of digital currencies working with the Bank for International Settlements and the central banks of Hong Kong, Thailand and the United Arab Emirates. Already more than 60 countries are at some stage of studying or developing a digital currency. According to the World Bank, digital currencies hold some of the biggest potential for the 1.7 billion people globally who are lack of a bank account. Such currency can help those migrant laborers to make tiny remittance to their families that can be cumbersome and expensive.
China under the ambitious President Xi Jinping wants to seize every opportunity to set international rules and standards, the digital yuan becoming recognize as the global currency, the advanced 5G telecommunications, the facial recognition and the arrays of advance technology will secure him as the immortal Chinese leader.
The digital yuan together with China as the preferred trading partners, will make this launch more appealing. For the US to maintain its supremacy, it is a long battle and to develop this cryptocurrency is imperative and the US will have to do some catching up.
Bitcoin
As mentioned, it is a cryptocurrency invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto. It is a decentralized digital currency with a central bank or an administrator, and it can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. The transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain.
As told, Bitcoins are created by mining. It is explained as a record-keeping service done through the use of computer processing power. During the process it is using a large amount of electricity, thus creating carbon footprint and it is not environmentally friendly. It is being criticized by its price volatility and doesn’t protect the investors. Bitcoins have also been criticized for use in illegal transactions.
I read that a lot of the “mining” is done in Xinjiang province because of the electricity as required. We know that the cost of electricity there is very low because of the coal-fire generation.
Price of the Bitcoin can be $44,000 or $19,000 and even as low as $250 in a matter of days or even hours.
I found myself to have the big difficulty to understand its principle and if someone can help me by explaining more about, I would be most grateful.
So that we know the Chinese government banned Bitcoin in 2018.
Facebook’s Digital Currency – Libra
It was first launched in June 2019 and it received a skeptical response from global regulators who warned that it could threaten monetary stability and if ended in the wrong hand can be used for money laundry. Even when it was backed by a group of founding members—including PayPal, Mastercard, Vodaphone and eBay by then, they have all quitted in late 2019.
But it is coming back again this time. The Facebook-led digital currency Libra is preparing to launch in a more limited format. Its launch date would depend on when the project can receive as a payment service from the Swiss Financial Supervisory Authority.
Like all the cryptocurrencies out there, Libra has been warned that it could threaten monetary stability and may become a money laundering tool. Libra had also come under a lot of cautious decision because of its close association with the social media network, which has already faced multiple privacy scandals.
Conclusions
It was found that the Chinese central bank deputy governor, Li Bo, said on April 18 that China’s digital yuan is not going to replace the US dollar. The digitization of the yuan is more for its domestic market for boasting its local spending.
According to the International Monetary Fund, data from 2016 showed that 93% of China’s imports and 95% of its exports were dominated in dollars. Not much have changed since.
The range of options for the world, yuan is still the least preferred, unlike the dollars, euros or the Japanese yen.
But we will need to pay close attention to the cryptocurrencies as we have evolved from the exchange of goods when our civilization first began to trade. Then we moved on to the more precious metals and very quickly we started the use of paper-notes. Came the credit card which we can trace into the 1930s but it was until 1973 the system was computerized. It waited until its payment terminals were connected and the merchants would accept a charge approved by the credit card company from the other end of the line.
This subject will be discussed again when the cryptocurrencies will take shape when they will enter into our daily life, and I hope by then we will all be more ready for it.