“A weak currency is the sign of a weak economy, and a weak economy leads to a weak nation.”

– Ross Perot

Scary but True: China Paves the Way for a US Digital Dollar

On November 6, I said that I could imagine the US creating a digital currency one day to fend off the threat of Bitcoin (or any other cryptocurrency) replacing the US Dollar.

It would offer all the conveniences of other digital currencies (which is what most concerns the average user), but it wouldn’t have Bitcoin’s most important benefit: the built-in protection against its own devaluation because of its strictly limited supply.

Our politicians don’t know much about economics, but realizing that such a feature would severely limit their ability to spend money, they’d make sure the US Digital Dollar would come with counterfeiting provisions.

The second major benefit of Bitcoin is that it’s a cryptocurrency, which means it allows users to transact their business anonymously. That, too, our government wouldn’t allow, because it would make it near impossible to crack down on income (and other) tax evasion.

The US Digital Dollar would come with some patina of privacy – perhaps limiting access to transactions between users. But the government would make sure it had full and easy access to all such transactions. It would sell this idea by pointing out that it would put an end to illegal drug and sex trafficking. However, it would surely be used by the IRS to eliminate tax cheating. And eventually, it would be the perfect tool for the government to know just about everything every one of its citizens was doing.

I know that sounds like an idea from some dystopian novel. But assume for the moment that you were the dictator of a big, powerful country with more than a billion citizens. How could you resist using a tool like this? How could you say no to being able to know exactly what all those people were doing – every place they went, at every hour of the day?

As with so many things these days, China is several steps ahead of the US in the move towards a government-issued digital currency.

China’s president, Xi Jinping, in announcing the new digital yuan, said that it was going to “accelerate the digital economy, digital socializations, state and industry digital developments, and updates.” And that it would move China “ahead of our competitors.”

According to my colleague Tom Dyson, writing in “Postcards From the Fringe,” China’s “pull together” should be considered an advantage in the digital currency race – an advantage only further solidified by Jinping’s words. The president’s push for advancement in the field certainly will impact China moving forward with the digital yuan, but it had an impact on Bitcoin as well. Following his speech, the Bitcoin/US Dollar parity jumped from $13,300 to $14,000.

In preparation for promoting the use of the digital yuan on an international level, China has tasked smartphone developer Huawei with stateside implementation. Huawei’s new phone, the Mate 40, is expected to have all the latest technology and features as well as its own proprietary digital yuan wallet. This will ensure that China’s new digital currency will find its way to the US. And the timing couldn’t be better. Due to recent supply restrictions, the Mate 40 might be Huawei’s last phone to be sold in the States.

If their new digital yuan succeeds, it would be a massive accomplishment for the Chinese Communist Party. According to a Reuters report, Yi Gang (governor of the People’s Bank of China) claimed that 4 million separate digital currency transactions had taken place since the start of the “human trials” last month.

And it’s not just China. From my friends at Tradesmith:

“The Bank of International Settlements, BIS for short, is known as the central bank for other central banks. In January 2020, the BIS published a new research paper – not its first one – on central bank digital currencies (CBDCs).

“Eight months ago, the BIS found that 80% of all the central banks they surveyed were investigating CBDCs, and 40% had moved from the research stage to the concept and design stage.”

China is definitely the front runner in the race. BIS and the European Central Bank (ECB) are trailing. Right now, the US is behind. But if China does succeed, you can bet that the US will be looking to follow.

Sources:

https://www.somagnews.com/digital-currency-statement-by-xi-jinping/

http://www.qstheory.cn/dukan/qs/2020-10/31/c_1126680390.htm

https://www.cnn.com/2020/11/04/investing/china-yuan-us-election-intl-hnk/index.html

https://www.theregister.com/2020/11/02/huawei_mate_40_digital_yuan/

https://www.reuters.com/article/china-currency-digital/spending-with-chinas-digital-yuan-around-300-million-pboc-says-idUSL1N2HO0B1

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