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How can the Digital Yuan perform against the current US dollar-based global financial system? Well, read this piece to understand the details.
Some central banks worldwide are already working on digital currencies, and China isn’t lagging. The Chinese digital Yuan is the leading one currently. The digital Yuan’s development is in its final phases, with the Chinese government already putting it to various local uses. For example, this Central Bank Digital Currency (CBDC) has been subject to transactions like payment of bus fares and train tickets.
But digital Yuan isn’t the only CBDC under development now. Other major economies, such as the UK, Japan, and the US, are also working on their CBDCs. While the projects are equally promising, they trail the Chinese digital Yuan project in many aspects. Most countries developing central bank digital currencies are still in the research phases. On the other hand, the Chinese version is already undergoing real-world tests and might become fully operational soon.
So the US, UK, and others still have much catching up on work. They must speed up their projects or surrender to the digital Chinese Yuan, which has already seen the light. And while doing so, they must not repeat the same mistakes that compromised Bitcoin’s initial performance. In addition, governments must ensure their digital currencies are immune to massive financial crises like the great depression that occurred in 2008.
Understanding the Current US dollar-Based Financial System
Even though it has had some challenges, the current traditional financial system has made tremendous achievements. For instance, it’s one of the most secure transaction methods today. Moreover, conventional economic systems are the most reliable due to government control. The US dollar, Euro, and Japanese Yen facilitate thousands of international transactions daily.
But despite the above benefits of government-issued money, there have been numerous problems. For example, the over-reliance on the US dollar has landed several countries deep financial problems. They can’t exercise their sovereignty fully because they’re vulnerable to US economic sanctions. No government wants to do anything that could prompt the US president to impose sanctions because they know the repercussions.
While the economic sanctions cause devastating problems to the target countries, they help ensure adherence to international laws by rogue states. The only problem is that the US government sometimes uses such sanctions to achieve its global political goals. Additionally, too much reliance on the US dollar for international trade seriously threatens various financial markets. For instance, any mistakes the Fed makes affect everyone globally.
What Does the Upcoming Digital Yuan Bring on Board?
Like other cryptocurrencies, the Chinese digital Yuan has a lot to offer. It’ll help countries to evade unfair economic sanctions and conduct international trade more seamlessly. Presently, countries use the SWIFT platform to receive or make cross-border payments. Unfortunately, the US government essentially controls SWIFT. That is where the digital Yuan will kick in. There’d be no more restrictions or too much political control with the Chinese CBDC.
Digital Yuan’s transactions will be faster because it’s like Bitcoin and other cryptocurrencies. Additionally, people will likely invest in the digital Yuan as they do with Bitcoin on renowned exchanges like the Yuan Pay App. The digital version will also increase flexibility and efficiency. For example, it’s possible to send digital Yuan from one user to another just by tapping two phones.
Even with the many advantages, Digital Yuan will face several challenges to emerge as the ultimate global currency. For instance, China controls just below 3% of the total foreign reserves in the world. Also, people will need to trust the Chinese digital currency, like the US dollar, for years. Creating the necessary digital infrastructure and promoting the digital Yuan will also take China a lot of time.
The Bottom Line
Many countries are currently developing their Central Bank Digital Currencies. These include the US, China, Japan, and the UK. China’s project is the leading one, with the digital Yuan already in the final stages. The Digital Yuan has immense potential, but it will take years to become the ultimate global currency. Some of the challenges it faces are; a lack of full-scale international cryptocurrency adoption at the moment, a lack of digital infrastructure, and China’s limited control over foreign reserves.
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