Last November, Beijing went “all in” on blockchain (Newsletter #14), saying they were going to move forward with a state-backed crypto currency. Unsurprisingly, when Xi Jinping made that announcement, things were already well underway. They launched a pilot of the digital currency the next month, and announced just last Wednesday that they were expanding the trial to include Didi, which has over 550 million users worldwide. Most governments, including the US, have been discussing digital currencies for several years, but so far the only adopters have been small countries (Venezuela, Tunisia, Senegal, and the Marshall Islands). China has been moving this way much more aggressively since Facebook announced Libra.
There is a whole web of Chinese initiatives that include this DCEP digital currency, their Belt and Roads initiative, and CIPS (China’s competitor to SWIFT, the dominant inter-bank international payment settlement system), which are all fundamentally designed to increase international acceptance of China’s currency (the Renminbi (RMB), or “Chinese Yuan”) and to displace the US Dollar as the dominant currency. In 1975, the USD was 84.61% of global reserve currency, with the next two largest reserve currencies being the Deutsche Mark at 6.62% and the Pound Sterling at 3.42%. By 2019 the USD had fallen to 60.89% of global currency reserves. Conversely, in 2010 only 1% of China’s international trade was denominated in RMB, but that had increased to 27.8% by 2014. In 2016, the IMF added the RMB to its SDR basket. And currently 14% of China’s more than $5 trillion in Belt and Road trade is denominated in RMB. China has been working on this for at least 20 years, and the deployment of a digital currency is yet another step towards gaining international traction as a reserve currency, and continuing to decrease global dependence on the USD (and, make no mistake, China isn’t the only one who wants this — the EU would very much like to see a reduction in reliance on USD transactions). Digital currencies are important because they reduce time, cost, and friction in moving money — which is more important than ever as we move to more electronic payments (e.g., Apple Pay) and more international services. I read something the other day, which I can’t find but will paraphrase here.
In the 19th Century, the Netherlands was a powerful country. Today, it remains a successful country, but it is no longer powerful. In many ways, the UK is on its way to becoming the Netherlands, and the US is on its way to becoming the UK or France.
The US, naturally, does not want this to happen, and to avoid it they may be forced to produce a digital currency much sooner than they, or the US banking industry, would like.