Abstract

۱٫ Introduction

۲٫ China’s launching of a central bank digital currency

۳٫ Cryptocurrency versus digital currency

۴٫ Is the digital yuan a threat to the US dollar?

۵٫ Conclusion

Declaration of Competing Interest

References

Abstract

     This article provides a detailed introduction to China’s launching of a digital currency. We conduct a comparative analysis concerning whether digital currency is a more stable and reliable currency than cryptocurrency and investigate whether a digital renminbi (or yuan) could replace the US dollar as a medium of exchange in international transactions. China has gained a first-mover advantage by rolling out a central bank digital currency (CBDC). But the outcome will depend on the US response as well as the future evolution of the US and Chinese economies. Most other articles on this topic focus on domestic use of the Chinese CBDC. But this study is unique in analyzing the prospects of a digital renminbi as a replacement for the US dollar in international commerce.

Introduction

     Over the past decade, the importance of cryptocurrency, especially Bitcoin, has rapidly increased. The crypto market has a great deal of potential, but its highly decentralized nature poses threats as well. The absence of a regulatory authority for monitoring and overseeing operations associated with such digital transactions makes cryptocurrency a high-risk investment. Because it is backed by only a handful of investors or by sentiment generated in the market, crypto has a volatile nature that foreshadows the instability and frailty it can introduce into the economic system as a whole (Aysan et al., 2021). Financial experts see cryptocurrency as the biggest challenge to the financial system and believe that immediate measures are needed to retain control of that system (Aysan et al., 2020). To maintain control of this system and limit any shift in it, several central banks have introduced a national digital currency (Auer et al., 2020). However, many countries still do not support the concept of a digital currency, as they see it as farfetched and claim that introducing one will only make the financial system more vulnerable to potential cybersecurity such as ransomware and financial stability threats (Nicole, 2021; Parn and Edwards, 2019).

Conclusion

     By rolling out its CBDC, China has undoubtedly gained a first-mover advantage. Its large population and the widespread familiarity with digital and cashless payment have helped the PBOC to offer its CBDC earlier than other countries. This first-mover advantage also puts China in a privileged position in determining the future direction of financial technologies. An early launch of the digital yuan would help China to internationalize its currency and to challenge the hegemony of the US dollar in the global financial system. China’s initial focus is international payments, but in the medium and long term, it wants to promote the RMB as an international reserve and investment currency as well. The successful internationalization of the digital yuan will require China to win the confidence of global users in the strength of the Chinese economy, financial system, and the functionality and security of the digital yuan. Despite these advantages, China also faces challenges in achieving these goals. The outcome depends on how the US responds and how the US and Chinese economies evolve in the future.