Traditional financial systems have been challenged by “new players” who are not in the financial market as we know it. An excellent example of one such player would be, Facebook who invented Libra, a digital currency that is expected to be used by 2.2 billion people or almost 1 in 3 of the global population when it launches. Central banks need new strategies before they are left out of these huge developments, by inventing their own digital currency, also called “Central Bank Digital Currency” (CBDC), or even unveiling new payment platforms built on blockchain networks.
China has been very keen on creating its own digital currencies. The country has stipulated strict rules to control Bitcoin and ICO in the past three years to “prevent” foreign digital currencies from entering the country in line with its policy “China uses its products; China will be prosperous”.
With a population of over 1.4 billion, China does not need foreign investments in the digital currency industry. It needs to invent the currency for its domestic use; and when the “Yuan digital” is released, it could potentially rise as the world’s financial leader.
An executive of the PBOC recently said that China’s digital currency will be distributed to major banks such as China Construction Bank, Industrial and Commercial Bank of China (ICBC), Bank of China, Agricultural Development Bank of China (ADBC), Union Pay as well as other tech companies such as Alibaba and Tencent.
Reports say the features of the currency are similar to Facebook’s Libra. The new currency can be used for purchasing. The currency will be tested in Shenzhen, Guangdong province in southern China.
How will China’s CBDC shake the global financial system? It is expected that the new currency could become a global currency rapidly. However, China is not the first country to have developed a digital currency. Venezuela is considered to be the first country to have made its own digital currency without backing it with US dollar reserves, but it has instead backed the CBDC with natural resources such as oil and natural gas. The currency is called “Petro”.
Venezuela has to turn to creating its own digital currency due to prolonged economic downturns and poor inflation. Offering “Petro” in the market is a way for Venezuela to pay its debts and get out of the traditional financial ecosystem that was backed by the US dollar. The Petro raised US$735 million in its first pre-sale. This is the world’s third largest fund raising through digital assets.
Another country that has considered having its own digital currency is Estonia, which is located in the northern part of Europe. As a northern European hub for technology, Estonia launched its digital currency named “Estcoin”, which was issued to 20,000 e-citizens in the country. However, the idea has been dismissed by European Central Bank (ECB).
Apart from their own digital currencies, central banks such as the Bank of Thailand (BOT), Monetary Authority of Singapore (MAS) and Swedish National Bank and many countries around the world choose blockchain to develop their own currency system, instead of creating new ones as blockchain networks can reduce financial costs and optimize service performance.
In addition, the Reserve Bank of India (RBI) is exploring the feasibility of introducing “Rupee Digital” in the country. Other countries also follow suit such as Uruguay, Bahamas, and other countries in the Caribbean.
Traditional fiat currency is being challenged by blockchain technology and the increasing popularity of cryptocurrencies. If central banks don’t see opportunities from this technological and financial disruption, their digital currency plan may not happen in the future.
