How China’s Digital Currency Could Challenge the Almighty Dollar

How China’s Digital Currency Could Challenge the Almighty Dollar

Charlie Campbell   Wed, August 11, 2021

Every morning, Mei Yi waves goodbye to his wife and 3-year-old son and sets off for his finance job in central Beijing, riding into town by public bike share. Like most urban Chinese, the 37-year-old has long abandoned cash and instead pays for his commute—and a lunchtime bite from a convenience store in his office building—with a flash of a QR code on his smartphone screen.

In recent weeks, however, Mei has jettisoned the Alipay mobile-payment app run by Ant Group, an affiliate of e-commerce behemoth Alibaba, for a digital wallet of renminbi (RMB), as China’s currency is called. The wallet is issued as a pilot project by the People’s Bank of China (PBOC), the country’s central bank. “It’s quite convenient to use, but there are no outstanding features to replace mainstream payment systems such as Alipay,” shrugs Mei. “For individuals, at least, any advantages aren’t that obvious.”

Perhaps not. But that tweak in Mei’s daily routine portends a seismic shift in how every person around the world will soon be handling money.

Mei’s digital wallet may lack the snazzy features of the popular payment apps, but in the end such apps are intermediaries, linked to users’ bank accounts. The content of his new wallet is actual legal tender, directly issued to him without the need of any middleman, traditional bank account or paper money to back it up. (To be clear, a digital currency is not the same as a cryptocurrency. While the likes of bitcoin, ripple and ether are largely unregulated—at times vulnerable to hackers, and subject to wild volatility—a digital currency is issued by a government.)

Physical money isn’t going to completely vanish. Although just $5 trillion of the $431 trillion of wealth in the world today is in the form of cash in pockets, safes and bank vaults, no central bank is seriously advocating the complete abolition of bills and coins. What makes digital currencies truly revolutionary are the tremendous new functionalities they offer. It’s the financial equivalent of the leap from postal service to email, or lending library to Internet.

Digital currencies will help governments fight malfeasance, smooth the transfer of assets across borders, and enable central banks to deal directly with citizens—especially helpful in times of crisis. The widespread adoption of such currencies stands to slash the operating expenses of the global financial industry. These amount to over $350 a year each for every human being on earth. Cross-border transaction fees today account for up to 8% of Hong Kong’s GDP, for example—a huge chunk that could be eliminated in a flash.

The SWIFT (Society for Worldwide Interbank Financial Telecommunication) system, which currently governs cross-border transactions between banks, may become obsolete. Depending on regulations, governments could also have direct visibility of financial transactions instead of having to ask banks to provide data. And the world’s 1.7 billion unbanked, including around 14 million U.S. adults, can be helped into the financial system. It’s the biggest change in money since the end of the gold standard.

“You’re going to see a massive transformation of the international monetary system,” says Michael Sung, founding co-director of the Fudan Fanhai Fintech Research Center at Fudan University in Shanghai. Given that the U.S. dollar’s role as the world’s currency may be greatly diminished, Sung also sees “a lot of big geo-political and trade effects too.”

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