very morning, Mei Yi waves goodbye to his wife and 3-year-old son and sets off in central Beijing for his finance job by public bike share. Like most urban Chinese, the 37 year-old abandons cash and instead pays to pay 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.
However, in recent weeks, Mei has jettisoned the Alipay mobile payment app of Ant Group, an affiliate of e-commerce behemoth Alibaba, for a digital wallet of renminbi as China's currency is called. The wallet is issued by the People's Bank of China as a pilot project to the country's central bank. 'It is quite ordinary to use, but there are no outstanding features to replace mainstream payment systems like Alipay, shrugs Mei. 'For individuals, at least any advantages aren't that obvious.
Doch that tweak in Mei's daily routine is likely a seismic shift in how every person around the world will be handling money.
Mei's digital wallet may not have the large features of the popular payments applications, but in the end such apps are intermediaries linked to users' bank accounts. The contents of his new wallet is actual legal tender, issued to him without the need of any intermediary, traditional bank account or paper money backed up.
Although only $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 serious advocating the complete abolition of bills and coins. What makes digital currencies truly revolutionary are the revolutionary new functions they offer? Digital currencies will help governments fight malfeasance, enable the transfer of assets across borders and smooth the control of central banks. The widespread adoption of such currencies stands to slash the operational expenses of the global financial sector. These amounts to over $350 a year a person is doing per an individual human as a human being on Earth. Today, cross-border transactions accounts for up to 8% of Hong Kong's GDP — a huge chunk which could be eliminated in a flash.
The SWIFT system, which currently governs cross-border payments between banks, may become obsolete. Depending on regulations, government could 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 adults, can be helped into the banking system by education. It's the biggest change in money since the end of the gold standard.
The Fudan Fanhai Fintech Research Center is about to have a huge change in the international monetary system, says Michael Sung, founding editor of the Fudan University Sanghing Innovation Center, Shanghai. When the role of the U.S. dollar as the world's currency will be greatly diminished, Sung also sees a lot of big geo-political and trade effects too.
A recent survey by the Bank for International Settlements - a Swiss institution that acts as 'central bank for central banks' says that 86% of them are actively researching digital currencies. Some 60% of banks polled are in the testing phase and although in U.S. the Federal Reserve is still investigating the concept, European Central Bank President Christine Lagarde says she wants digital currency by 2025.
According to some estimates, a fifth of the global population will be exposed to digital currencies within 3 years. By 2027, approximately $24 trillion of digital assets around the world are expected to be in digital form.
China is not the first nation to launch a digital currency — the Bahamas Sand Dollar was introduced six months before the digital RMB. He is also not surprising that China is an institute of the 7th century, the currency which invented the banknotes.
While Washington is in no rush to disrupt the new financial system that it dominates, Beijing sees geopolitical gains in helping establish the traditional protocols. Several million people are currently using a digital RMB wallet in China, the PBOC says, and they have made over 70.7 million transactions totaling 34.5 billion RMB. The impetus is being coming firmly from the top. China should'actively participate in formulating new rules for digital currency and digital tax to create competitive advantages, President Xi Jinping wrote in Qiushi, the chief ideological journal of the Chinese Communist Party, last year in Qiushi, the international digital currency of China.
Although China was leading the race to make a digital currency, the starting pistol was fired in a U.S. boardroom.
That a private company, servicing almost a third of the global population, was poised to circumvent the existing international monetary system shocked central banks already reeling from the rise of cryptocurrencies. It posed serious questions for the banks' control over their own countries' money supply, interest rates, inflation and so on. One person was giving Libra a bit of a wake-up call that this is coming fast, Federal Reserve chair Jerome Powell told the House Financial Services Committee last year.
Since 2014, Beijing had been quietly studying new RMB, but the Facebook announcement denoted an urgency alternative. Four months later, Xi encouraged officials in the fourth plenum of CCP to embrace the opportunities presented by the blockchain technologies that support digital currencies. Today, China is the world leader in terms of enterprise adoption of the blockchain, which may enable digital currencies as they develop.
Of course, Chinese commerce is already largely digitalized by the mobile duopoly of WeChat and Alipay, which comprise 96% of all private payments in the country. Try to pay for a taxi in Shenzhen or Shanghai with dirty notes and prepare for physical looks. But the sway these private firms hold over the domestic economy is a matter of intense discomfort for party officials, highlighted by a crackdown that began late last year on Alipay, which runs Ant Group. Regulators scuttled its IPO, ordered a record $2.8 billion fine against parent Alibaba and levied the firm to restructure.
Beijing is also paving the way for state-backed financial competitors. Businesses are legally obliged to refuse commercial payment systems, but their digital RMB is the normal tender. They are legally free to accept them This empowers China's largest banks to issue their own digital wallets, hopefully creating a multi-polar environment with greater competition, a richer set of services and ultimately greater resilience for the economy.
There is an important role for the government to play because commercial forces sometimes go overboard, CEO Piyush Gupta of the free-market bank DBS tells TIME. 'To build a level playing field policy is very important.
In this way, digitization complements already occurring innovations. For years, big banks had a lot of resources but also a reputation for lacking innovation, because it was too easy to make money the traditional way. They had data but no idea how to use it. The rise of online payment providers means they're now forced to compete, aided by new regulations. In Europe, for example, new open banking rules force banks to share their data with third-party companies that can use it to create new products and services.
In times of crisis, they enable governments to send aid and stimulus payments directly to affected citizens’ smartphones regardless whether the recipients have a bank account.
The pandemic has highlighted the deficiencies in the current system. As of April 30, 2020, the U.S. government had sent paper coronavirus stimulus checks totaling nearly $1.4 billion to 1.1 million deceased people. Delays were also rife. In March 2020, knowing the months of waiting many people would suffer before receiving their stimulus checks, Congress considered a proposal to issue every American entitled to financial relief a digital wallet.
Digital currencies can also be tailored to specific purposes. For example, in the Chinese Pilot Program, money has an expiration date of a few weeks because authorities are hoping to drive consumption in an economy trying to recover from pandemic. Cash can be customized for different purposes. If the government is trying to stimulate the hospitality industry in a particular area, for example, it can program money to be used for meals and drinks but not for petrol or power tools. If a hurricane affects a coastal town, the government can rapidly send relief payments to those affected and spend only on essential supplies.
At the start of the pandemic, around $50 billion of taxpayer money was paid to bail out U.S. airlines and prevent huge layoffs. In reality, $45 billion was spent on buying back stock to artificially prop up share prices and the linked bonuses of executives. Although digitalization would have prevented such wanton misuse, it would also allow authorities to microtarget where every cent of every stimulus payment went and what it achieved.
'It’s transformative, says Oliver Wyman, head of corporate and institutional banking practice at consulting company Jason Ekberg.
Of course, there are drawbacks. A company digitizing its online banking information is a sure thing to do as of now, which could increase the potential for hacking and cybercrime. There's no question that it creates risk, says Ekberg. 'The question is how can you control and contain your risk?
Neha Narula is the director of the Digital Currency Initiative at MIT Media Lab. Then, he agrees Digital currencies could also enable the state to make it impossible to buy alcohol from vocal NGO, for example, or donate on a weekday to a local church. That is a special concern in social systems like China's where the potential for autoritarian monitoring would be exponentially increased.
Critics have argued that the digital RMB will only become an extension of surveillance state. The Linked to China's social credit system, it could see citizens fined for behaviors in a split second for undesirable behaviors. Dissidents could see their wallets emptied or stolen offline. Countries doing business with Beijing could be required to use the unprecedented RMB — giving Beijing an unprecedented storehouse of business data.
Still, those concerns may well be overplayed. In most jurisdictions, it is already impossible to open a bank account without strict ID checks, and large transactions trigger banking scrutiny to root out criminal activity. Commercial transactions are also less incontrovertible than digital payments apps, since they do not have to take place over an Internet connection. China intends to allow smaller transactions to take place via near field communication, in a non dissimilar fashion to exchanging a file using Bluetooth or AirDrop.
In a June speech, Mu Chang-chun, director of the PBOC digital currency research institute, said there would initially be four classes of digital wallets. The lowest, anonymous tier would be linked only to a phone number with a balance limit of 10,000 RMB and single payment limit of 2,000 RMB. If you want more, Mu said, 'you can upgrade your wallet, upload your valid ID and bank-account information.
At present, the Federal Reserve is focused on disrupting a system in the U.S. it views no premier-move advantage in controlling a system it controls. Today, over 60% of all U.S. bank reserves, as well as nearly 40% of world debt is denominated in foreign currencies. It is more important for the U.S. to get it right than it is to be the first, Powell said in October.
Narula adds, 'It is right to be cautious. However, given that there are so many pending decisions about exactly how a digital currency might be designed and rolled out, and how it might impact different sectors of the economy, she says, 'The U.S. needs to accelerate its research.
The RMB will not be poised to usurp the greenback anytime soon. China currently limits capital flow to prevent capital flows and currency fluctuations from undermining its export-reliant economy. Until it stops doing so, international use of the RMB will be limited. 1 economy, a huge proportion of the money circulating will remain in dollars. Developing nations will also prefer to retain dollars over erratic domestic currencies.
Still, the dollar has dominance will not go unchallenged. The rise of digital alternatives could mean the end of the dollar as a default currency for developed nations. Why, for example, will Chinese loans to Central Asia and Africa be enacted in dollars?
Digitalization promises to democratize international payments by allowing exchange between currencies without exchanging using the dollar first. In April, JPMorgan, DBS and Singapore's state-owned investment company Temasek announced the creation of a digital currency clearinghouse. Several other proposals are still in the works.
Many nations — especially those with testy relations with the United States like Russia and China — would also prefer to settle directly via digital currencies. Then there is the big threat for Iran's currency since the US have twice mooted the dollar to weaponize the dollar for geopolitical gains. This is not least because the U.S. has expanded its currency so that it can block all transactions with Greece, for example. It is a key reason that Beijing has been working hard to establish common ground for digital currency values. China was the first to contribute digital currency content to ISO 20022 protocols - a new global standard to cover data transferred between financial institutions such as payment transactions, credit and debit card information and securities trading and settlement information.
Reducing reliance on the U.S. dollar is an explicit goal of many countries developing digital currencies. In a speech in 2019 Mark Carney, governor of the Bank of England, argued that technology could solve the problems of dollar hegemony by giving the rest of the world, especially developing countries, to win back control over monetary policy. 'Any multipolar system is unsuited for a unipolar world, he said. 'We would do well to think through every opportunity, including those brought into the market by new technologies, to create a more efficient and balanced system.
Fairness also applies to investments. One of the potentials of digital currencies is the acceleration of tokenization, or the packaging of a denomination into a form that is instantaneously exchangeable. If the value of worldwide real estate is $280 trillion, it is worth USD$120 billion. But trading it is extremely difficult, requiring hefty fees, negotiations and red tape.
How can I express its value in a token that could just as easily represent a fractional share of a beach house in Tokyo, a sapphire in Mumbai or a wine collection in Normandy? Fine art, for example, appreciates far faster than the stock market. But today it is an investment that is available only to those with a Sotheby's account and seven figures in the bank. Cryptocurrencies are already awakening some people to such possibilities, but the friction-free adoption of digital currencies promises the universal exchange of value between investors and consumers of all classes. It has been more than a decade since Sung was CEO of Technological Engineering. That, says him, is actually the promise of these digital technologies in the world of finance. And China is naturally proud to be in the vanguard.
'Although the digital RMB is not very popular at the moment, I believe it will be the new payment method in the future, says coffee merchant Duan Chu, 32, as she enjoys a burrito paid for by the digital currency in downtown Shanghai. I really want to support it as much as I can.