Oct 16, 2020
The 'global arms race' of the decade is a rush to create a digital currency
By Anne Gaviola
This will be one of the most important years for cryptocurrencies: Mike Novogratz
China’s central bank is in the midst of an ambitious campaign to become the first mover in a global race to issue a successful national digital currency.
Its largest trial to date involves a lottery in Shenzhen, the country’s tech hub, during which 50,000 of the two million local applicants were awarded a piece of the nearly $2 million-dollar prize money. Winners each received the equivalent of about $40 in digital yuan —also known as the Digital Currency Electronic Payment (DCEP) — downloaded through the digital renminbi mobile wallet app.
They have seven days to spend the virtual funds at any of the participating 3,389 retailers, including Shangri-La hotels and Walmart. Any unused digital yuan will be rescinded after Oct. 18.
China’s pilot project comes as other advanced nations including Canada and the U.S. show increasing interest in developing a digital currency. On Oct. 20, the Bahamas is set to roll out its e-currency trial dubbed “Project Sand Dollar.” But according to Shanghai-based Trivium analyst Linghao Bao, China is “absolutely leading by a mile” in the “global arms race” to develop a national digital currency.
China’s digital yuan lottery comes on the heels of a report issued by the Bank of Canada, in conjunction with six other central banks including the U.S. Federal Reserve, outlining parameters for a Central Bank-issued Digital Currency (CBDC). It highlights foundational principles and core features of a national digital currency.
For example, the report said a digital currency should "support wider policy objectives and do no harm to monetary and financial stability," be secure, convenient, available at low or no cost to end users and be underpinned by a clear legal framework. According to the report, a CBDC should also have an appropriate role for the private sector and promote competition and innovation.
In an email to BNN Bloomberg, Bao said there are only two “credible players” to become the first significant mover: The U.S. and China. If the latter is successful, he said digital currency could provide the infrastructure to eventually threaten the greenback’s status as the currency of international settlement. Though China has "a long way to go," and privacy concerns remain, he believes it's moving in "the right direction."
Meanwhile, Bao said America is “very complacent” about its global reserve currency status and has “barely done anything on this front.” California-based Facebook has made headlines with its grand plans for the Libra cryptocurrency. But since Facebook formally announced the project in June 2019, it has faced a series of hurdles including regulatory scrutiny.
Electronic payments and central bank-issued digital currencies were the focus of a statement released by the American Treasury Department Tuesday. It outlined interest in CBDCs by G7 countries but says “no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory, and oversight requirements.”
A stablecoin is a relatively new class of cryptocurrencies that are less prone to volatile price swings because they are backed by a reserve asset. Libra is a stablecoin as its value is designed to be pegged to a basket of low-volatility fiat currencies and assets including U.S. dollars and government bonds, euros, U.K. pounds, Japanese yen and Singapore dollars.
If successful, Karl Schamotta, chief market strategist at Cambridge Global Payments, said a national e-currency could promote a more resilient, inclusive and efficient payment system. He told BNN Bloomberg that during a financial crisis, for example, it could allow for the direct delivery of “helicopter money” to households, “avoiding issues that have dogged government stimulus efforts through the coronavirus pandemic.”
A cashless society as a tool for administering economic support has been the subject of academic interest, especially as it relates to negative rates. But, as Bank of Canada spokesperson Rebecca Spence pointed out to BNN Bloomberg, as long as alternatives such as cash, foreign currencies and cryptocurrencies exist, the impact of such an emergency policy move would be less effective and more difficult to predict.
Spence said in an email that in its research, the central bank is considering “how a CDBC could be designed to bear interest, both negative and positive.”