Pros and cons of digital currencies: Global impact analyzed

27 Jun 2022 | Finance

About the author

Hooshang Bakht

Brego Business was started with a mission to make entrepreneurship easy. Our goal is to help business owners grow and scale without having to deal with the day-to-day stress of running a business. We specialize in providing services that help business owners grow their businesses, including search engine marketing (SEM), social media marketing (SMM), LinkedIn marketing, video production, accounts receivable (AR), accounts payable (AP), internal audit, VCFO, and recruitment. We have helped more than 500 brands grow their businesses. We work closely with the clients to understand their unique needs and develop customized strategies that deliver measurable results.

Read More
digital currencies

In just the last few years, the world has witnessed a rapid transformation of money. Ranging from cash to digital payments (UPI), mobile wallets to cryptocurrencies, money has different forms but all are precious. From the United States to Japan, nearly 86% of countries are exploring a new-age form of currency – digital currencies. However, China gets an edge over this competition and is all set to launch its digital currency in 2022. Trials for the electronic Chinese Yuan (e-CNY) started in April 2020.

The e-CNY pilot program was launched in Tianjin, Chongqing, Guangzhou, Fuzhou, Xiamen and six cities in the coastal Zhejiang province. In 2021, announced the success of this Chinas program in Suzhou City near Shanghai in Eastern China, where nearly 181,000 consumers were given ¥55 (£6) of e-CYN to spend at outlets.

In Part I of this blog, we talked about how countries are developing their own digital currencies, and now, we will explore how digital currencies work and what it could mean for countries like China.

What will be the impact of China’s digital currency on its own economy?

China’s digital currency, also known as e-CYN, has been a topic of discussion since 2013 when China’s most popular messaging app, WeChat, launched its mobile wallet. The digital currency was introduced four years after the advent of bitcoin, and initially, it seemed like a side project of the Chinese government going through a few trials. However, the focus on China’s digital currency started picking up dramatically around 2017, leading to public trials.

Building your business success with our strategies and solutions.

Increase your Sales: Lets boost your sales with irrestible marketing tactics

Control your expenses: Take charge of your expenses and optimize your performance.

Build your team: Partner with us to build a high-performing team for your business

Get Started!

An official from the People’s Bank of China (PBOC) explained that China’s digital currency, e-CYN, is a legal tender. This means that no organization in China can refuse to accept it. Like paper CYN, the original legal tender, it is issued by the PBOC. China’s digital currency, e-CYN, is worth the same as paper currency, and both can be used interchangeably. Users can exchange or control China’s digital currency, e-CYN, via a mobile app, and purchases would be possible through China’s largest state-owned banks. China’s digital currency, e-CYN, represents a significant step towards a cashless society and is expected to revolutionize the way people conduct transactions. With China’s digital currency, e-CYN, the country aims to provide its citizens with greater financial security and control while also reducing the cost of producing and circulating paper currency. The introduction of China’s digital currency, e-CYN, has sparked much interest and discussion worldwide, and many experts believe that it could have a significant impact on the global financial system in the years to come.

Presently, the e-CYN seems to be used only for domestic payments (within China) — and most probably for small day-to-day payments involving consumers, businesses or public authorities exchanging e-CYN online or in-person. However, according to a senior central bank official, electronic YUAN could be used for international transactions. The digital currency promises to both strengthen and regulate China’s economy, which was recorded at US$17.7 trillion (114.4 trillion Yuan) in 2021. Currently, as the Chinese economy is rapidly shifting from high-speed development, digital currency is likely to benefit China through a boom in innovation, investments, jobs and taxes. Reports estimate that the total investment of the economy in China amounted 41.6 percent of the GDP. China’s push to issue a digital currency is likely to go a long way toward expanding the economy and the global influence of the Yuan.

The development of e-CYN also means China’s central bank can have greater control of China’s evolving digital payment ecosystem. Digital Yuan will allow China to bring some of its unbanked and rural population to the mainstream economy, track money and fight against financial crimes. China is rolling out its digital currency at a time when the country’s digital economy is rapidly growing. Reports estimate that the digital economy accounted for more than 30% of China’s GDP in 2020 and can take it to 50% by 2030.

e-CYN will also make payment transactions more efficient, timely, and nearly costless. Cross border payments will also see a transformation once the digital Yuan is available outside China. If it remains under the control of the Chinese central bank, it will make the Yuan influential in the international market.

China’s transition to digital currency: what does it mean for the global economy?

As part of its strategy to globalise the digital Yuan and minimise the dependency on the US-dollar-dominated financial system, the People’s Bank of China has issued a CBDC called e-CYN or digital Yuan or e-RMB. China has gained global supremacy through the first-mover advantage, but the outcome greatly depends on the US response, as well as how the US and Chinese economies grow in the future. With strong fintech foundations, the US is likely to catch up with China’s digital currency quickly, and if this happens, China’s idea to capitalise on the e-CYN will be badly hampered.

Furthermore, Chinese banks lend money to countries in Asia, Africa, and South America for infrastructure development and research projects. Once China regulates its digital currency in the international market, countries that have taken loans or will take in the future might be pushed to accept and repay loans in digital Yuan. This transition will make transactions of other global currencies to Chinese digital currency, reducing the dependency on the US dollar and letting China control international lending and trading.

Economists believe that the early digital currency issuer can reap the benefits of global digital finance, and China has already taken the lead. However, the biggest concern with Chinese digital currency is its attempt to disintermediate the global finances and kill the American banking system, which might lead to sanctions imposed by the US and other countries in the world. The concern is also about privacy when all the transactions will be publicly visible on the blockchain. Digital Yuan also raises a question on the role of commercial banks by cutting their traditional role of intermediation.

The US dollar has always been used as an agent of most cross-country transactions through the SWIFT international banking protocol. This process ensures a high value of the Dollar, which ultimately benefits the US government to borrow easily. The act of Chinese digital currency replacing the US as a global currency could mean havoc for markets, especially the stock market in the Indo Pacific and the countries that heavily rely on the US dollar for international trading.

In the case of India, 86% of the country’s imports and exports are invoiced in US dollars, while just 5% and 15% of India’s total imports and exports, respectively, originate in the US. Even after recent cut-offs, China makes up 16.53% of India’s exports while imports make up 7.6%, and these are also invoiced in US dollars. Hence the biggest concern for India is that China might completely take over its regional dominance in South Asia and Indo Pacific with its digital Yuan.

What would be the benefits and drawbacks of the digital Yuan?

China is planning to roll out digital currency to efficiently meet the people’s demand, improve transactional convenience and privacy, and tap into the growth of the country’s digital economy. But this is just one side of the coin. Let us look at both the positive and negative sides of digital currency.

In recent years, central bank digital currency (CBDC) has emerged as a preferred choice of central banks to make their mark in the digital economy. However, it is important to know what values they actually bring. Mentioning the digital Chinese Yuan mainly, here are notable advantages associated with it.

  • The first and foremost benefit of CBDS refers to the reduced transaction costs as banks will be liable to render faster support to financial institutes and retailers for more secured payment.
  • Digital currency also focuses on fostering economic growth through investment and taxes alongside digital innovation.
  • Management and storage of digital currency are comparatively cost-efficient, easy and hassle-free than cash of value.
  • The cost factor is deficient as digital currency does not come with an additional cost of printing, storage, transportation and disposal.
  • Liquidity is one of the prime benefits of digital currency. Banks can offer short-term liquidity support even if it’s a bank holiday or a national event.
  • Financial inclusion is the first thing that triggers the mind when thinking about digital currency. Digital currency can ensure the maximum involvement of unbanked households and businesses by allowing them access to payment tools at a lower cost.
  • Another bright side of digital currency is the lack of involvement of intermediaries.

When it comes to digital currency China, there are many advantages such as being secure and cost-efficient. However, it’s important to note that there are also some notable setbacks to using digital currency. One of the primary concerns is the potential for digital currency China to be used for illegal activities such as money laundering or financing terrorism. Additionally, there is a risk of cyber attacks or hacking, which could compromise the security of digital currency China transactions.

Another disadvantage of digital currency China is the potential for technological issues or glitches that could disrupt the system. In addition, some people may not have access to the technology necessary to use digital currency, which could lead to exclusion from certain financial transactions or services.Furthermore, the anonymity of digital currency China transactions could raise concerns about privacy and government surveillance. Additionally, if digital currency China becomes the dominant form of currency, it could lead to the decline of cash-based economies and negatively impact the livelihoods of people who rely on cash-based transactions for their livelihoods.

Despite these concerns, many experts believe that the benefits of digital currency China outweigh the drawbacks, and it is likely that we will see increased adoption of digital currency China in the years to come.

  • Above all, CBDCs have geographical restrictions; thus, they will only be accepted in the country that issued them.
  • CBDC is completely trackable by the Central Bank of China, so the government will have complete track of who, where, and when using digital currency.
  • Central banks can give direct competition to payment service providers, killing banks’ profit and hampering the new developments.
  • Central bank-controlled digital currencies can also increase the risk of system-wide bank runs, which might pose a threat to the country’s economy.
  • Another concern with CBDC is the forceful imposition of this new legal tender. Since the Central Bank only issues digital Yuan and there is no third party involved, the Chinese government might force the companies (within China) to trade in digital Chinese Yuan.
  • Currently, the digital Yuan is in its pilot stage for domestic use, and other countries might still not be ready to use it owing to associated privacy concerns.

China is planning to roll out CBDC amid escalated tensions between China and US, and Europe. The situation clearly makes it a worrying time to give China the first-move advantage. But given its risk to the global market, it is vital for the US, UK, EU and especially India to test their own digital currencies immediately. However, India has started planning for its CBDC and has set a deadline to launch its first digital rupee by 2023.

Click To Know About Our Accounting Services

Ready to grow your business?

Drop in your details and schedule a free consultation with our team!

Get Started!

Looking to grow your business?

Book a free consultation with our experts!

Get Started!

Book a free consultation with the best

Drop your contact details into the form, and we’ll reach out to you immediately!

Frequently asked questions

What is China's digital currency?

China's digital currency, officially known as Digital Currency Electronic Payment (DCEP), is a digital version of China's national currency, the yuan (CNY).

How does China's digital currency work?

China's digital currency works similarly to other digital currencies, using blockchain technology to facilitate secure and fast transactions between users.

What are the benefits of China's digital currency?

The benefits of China's digital currency include increased efficiency and security in financial transactions, reduced costs associated with cash handling, and greater financial inclusion for those who lack access to traditional banking services.

What are the drawbacks of China's digital currency?

The drawbacks of China's digital currency include concerns over data privacy and government surveillance, as well as the potential for increased government control over financial transactions.

How is China's digital currency different from other digital currencies?

China's digital currency is different from other digital currencies in that it is issued and controlled by the Chinese government, whereas other digital currencies like Bitcoin are decentralized and not controlled by any government or central authority.

Is China's digital currency widely accepted in China?

China's digital currency is not yet widely accepted in China, but the Chinese government has been promoting its use through various initiatives and partnerships with banks and other institutions.

How does China's digital currency impact global financial markets?

China's digital currency has the potential to impact global financial markets by providing an alternative to traditional payment systems and potentially challenging the dominance of the US dollar as the world's reserve currency.

How has the adoption of China's digital currency been received by the international community?

The adoption of China's digital currency has been met with some skepticism and concern from the international community, particularly around issues of data privacy and government control.

How can individuals and businesses use China's digital currency?

Individuals and businesses in China can use China's digital currency for a variety of transactions, including online shopping, peer-to-peer payments, and more.

What is the future of China's digital currency?

The future of China's digital currency is uncertain, but it is likely that the Chinese government will continue to promote its use and potentially expand its adoption both domestically and internationally.