How Is Digital Yuan Different?

How is Digital Yuan Different?

In our last story on Digital Yuan, we saw the composition of Digital Yuan and some of its disruptive features. In this story we dive deep into some strategic areas of the currency and try to understand how it is positioned to impact the global economy in long run. And of course, this story answers many of the questions surrounding the new digital currency.

Crux of the Matter

How Is Digital Yuan Different From Bitcoin?

  • Bitcoin is a decentralized currency which means that it has no controlling authority like a government or a central bank. Digital Yuan on the other hand is the legal tender issued by China’s central bank.
  • In bitcoin, the identity of its users is not known. While Digital Yuan with its innate traceability feature overcomes the user anonymity issue.

Currency Stability
China will not increase its money supply by introducing new form of currency. With every Yuan introduced digitally in the market, an equivalent worth of physical cash will be drawn out from the circulation thus ensuring the stability of economy.

Will Digital Yuan Disrupt The Global Financial System?
The US Dollar holds 88% share in international foreign-exchange trades. Moreover, at present most of the international settlements happen over the SWIFT technology which is a messaging network used to securely transmit information through a standardized system of codes. The US administration has a significant authority over both the mechanisms.

The Chinese Renminbi holds mere 4% of share in international foreign-exchange trades. Hence, simply with its own digital currency, China cannot replace US Dollar in international transactions. But it will definitely open up new options for people to transfer money and maybe at better margins.

Dollar Weaponization
With US being the prime source of dollar, it has the ability to freeze institutions and nations by laying various sanctions on them. Sanctioned nations are kicked out of the global financial system as banks and financial institutions are prohibited from doing transactions with them. This entire phenomena is known as Dollar Weaponization.

Examples Include:

  • Crippling Economies of Iran and North Korea owing to US laid sanctions.
  • Blocking the movement of top military officials financial assets in Myanmar amidst the coup.
  • The unending US – China conflict followed by multitude of economic and financial sanctions laid on China.

Aim Of China
One of the prominent aims of Beijing for introducing Yuan is to limit the power of US dollar in international settlements.
Thus, nations that are penalized by US can transact and transfer their money through Digital Yuan – without the knowledge of US.

This takes away sanction leveraging power of the US.

Nicholas Burns, American diplomat

Final thoughts?
It is maybe farfetched to say that Digital Yuan will take over US Dollar. Nevertheless, the building blocks are too important to be ignored.

  • The official currency of China is Renminbi. Yuan is the basic unit of the renminbi, but internationally the word is also used to refer to the Chinese currency.
  • One yuan is divided into 10 jiao and one jiao is divided into 10 fen.
  • The United States dollar is called Meiyuan in Chinese, and the euro is called Ouyuan.

Solving the Mystery of Digital Yuan

Let us know about the disruptive nature of world's first digital currency designed by China's Central Bank- Digital Yuan.

Since 2014, China’s Central Bank has been working on designing its very own Digital Currency and is now making real world trials across China’s major cities. But what is Digital Yuan and why is it making such a huge buzz in the global economy. Read the story to know more.

Crux of the Matter

What Is Digital Yuan?
Digital Currency Electronic Payment (DCEP) i.e Digital Yuan is a digital version of China’s physical currency Yuan. Simply put, the aim is to to digitize Yuan currency notes and coins in circulation. The currency is designed by China’s central bank People’s Bank of China (PBOC)

What Is So Amusing About It?
Digital Yuan will be the world’s first Central Bank Digital Currency (CBDC). It is at present only digital currency that has a legal tender backed by nation’s central bank PBOC.

How Is It Different From Regular E-Wallets?
To avail the services of an online payment, we need to link the wallet to our existing bank account. Thus, a bank is an intermediary for the transactions to happen. Now the money that is transacted via banks is still the physical currency in circulation. Hence in online payments, we are simply transacting physical money via electronic mode.

However, that is not the case with Digital Yuan. To use this digital currency, one will have to install an app, put the digital currency in the wallet and then directly start transacting – just like we do with normal (physical) cash.

What Good Will It Do?
Physical currency is expensive to produce and store. Moreover, it is easy to counterfeit and can thus be employed for illegal purposes. These issues can be resolved by replacing the existing currency with Digital Yuans. Lastly, it will increase competition and thus efficiency in the online payment space.

What Is The Ruckus Around Controllable Anonymity?
Digital Yuan had been under scrutiny for invading an individual’s privacy as it is trackable. As per PBOC member Mu Changchun, monitoring is limited to the transaction undertaken, keeping the identity of parties involved private.

It Is Also Programmable Money
Digital Yuan is programmable – it means that to a larger extent the government can influence the way in which the money can be spent. Say if the Chinese govt wishes to increase monetary flow in the system, they can put expiry dates on Yuan utilisation. This will increase spending, and thus induce the required sentiment in the economy.

How Will The Money Be Distributed?
It will be in 2 tier system:

1. China’s central bank will issue digital Yuan to commercial banks.
2. In turn, commercial banks will be responsible for handing over the Digital Yuans to general public. They will also be provide the service of transforming physical currency into digital.

  • The official currency of China is Renminbi. Yuan is the basic unit of the renminbi, but internationally the word is also used to refer to the Chinese currency.
  • One yuan is divided into 10 jiao and one jiao is divided into 10 fen.
  • The United States dollar is called Meiyuan in Chinese, and the euro is called Ouyuan.

Why is US Dollar World’s Base Currency?

Why is US Dollar World's Base Currency?

US has been a super power since long! And the supremacy comes largely also with the fact that its currency is base indicator and is used as a medium of exchange for huge transactions across the globe. But how did US dollar came to this prominence? Has it been like this forever? We are here to tell you the story of how US dollar became the base currency of the world.

Crux of the Matter

Each nation’s Central Bank keeps foreign exchange reserves. Globally, all such reserves are reported in US Dollar (USD), making it the base currency worldwide. You would have also seen that most currencies today are quoted in dollar terms only.

But, the question is: What made the USD global base currency ?

Rewind to World War I
In 1914, world’s major transactions were conducted in British Pounds (£). By the end of World War I, Britain had lost quite a chunk of money and for the first time in the history, Britain had to borrow money from the outside. With this, Pound lost most of its value and the only lender of choice which also replaced the former was US Dollar.

During World War II
During World War II, US was the main arms supplier to all of its allies. During the 1940s, Gold was the major medium of all trade. Thus, in return of all the weapons supplied, US used to get paid in Gold, making it the largest holder of Gold.

Bretton Woods System
Leaders from 44 nations met in the town of Bretton Woods, New Hampshire to establish a stable system of managing foreign exchanges that does not put any nation at a disadvantage. Thus, came into the existence the famous Bretton woods System as per which: The world’s currencies were linked or more precisely pegged to the US Dollar. While the US Dollar was linked/pegged to Gold.

Crowning of the Reserve Currency
With Bretton Woods System, US Dollar became the official reserve currency of the world. Reserve Currency is one of the fundamental mediums of exchange for global trades and transactions, making Central Banks to hold them in huge amounts.

The Working
The exchange rate for currencies worldwide was fixed at $35 per ounce of Gold, meaning, for every ounce of gold that nations deposited with the US, they got US $35 in return. Thus with Bretton woods, instead of Gold, countries started accumulating US Dollars.

Collapse of Bretton Woods
In 1971, US ran into financial deficits owing to the Vietnam War combined with funding of various development projects. In order to finance the same, they started printing money, flooding the global market with USD. As world nations were worried of the stability of the US dollar, they started converting their USD reserves and Treasury Bills back to Gold.

But at that time, total US dollars held overseas were much more than the Gold held by the US, which also broke the premise of Bretton Woods Agreement. US in no way could suffice the Gold demand with its existing reserves. And hence, the then President Richard Nixon de-linked the US Dollar from Gold.

The collapse established the present day floating system – wherein the market forces of demand and supply determine the exchange rate of global currency.

Nonetheless, USD with 61% share in currency reserves held by global central banks is still considered to be world’s reserve currency.

  • The International Monetary Fund (IMF) was set up during the United Nations Monetary and Financial Conference in Bretton Woods in 1944. Currently, the Chief Economist of IMF is Gita Gopinath.
  • The World Bank was also created during the Bretton Woods Conference in 1944. The motto of the organization is ‘Working for a World Free of Poverty’.
  • Presently, Kuwaiti Dinar (KWD) is the highest-valued currency in the world.

Why Did US Add India To Currency Manipulator Monitoring List?

Why Did The US Add India To Currency Manipulator Monitoring List

While the US has branded Switzerland and Vietnam as currency manipulators, it kept India under the currency manipulator ‘monitoring list’ for intentionally devaluing Indian Rupee. But why would RBI devalue the Indian Rupee? How are the currencies valued? Let’s throw some light on this matter.

Crux of the Matter

RBI Under Watchlist
US has put RBI under the watchlist of currency manipulators for intentionally devaluing the Indian rupee to gain benefits. You might wonder how devaluing the Rupee helps India? In simple terms, devaluing the Rupee helps in boosting exports to foreign countries, which results in boosting the economy. However, RBI can devalue the Rupee up to a certain extent only, otherwise, it may have ill effects on the Indian and the global economy.

In recent, RBI has been buying dollars and selling rupees in the global market. This can also be seen from the growing foreign exchange reserves of India, which stood at $578 billion in December.

For instance, if $1 = ₹75 today, then,
1. if the the value of the rupee becomes $1 = ₹80, then rupee is said to have depreciated,
2. if the value of the rupee becomes $1 = ₹70. then rupee is said to have appreciated.

How Did US Come To Know About It?
To identify currency manipulation, the US has set three benchmarks.

First Benchmark
The first one is that the Bilateral trade surplus limit with the US should not cross $20 billion. In simple terms, the export value from India should not exceed the import value by more than $20 billion at any particular time. If India doesn’t import from the US and keeps exporting it will negatively impact the local market of the US. India has crossed this limit.

Second Benchmark
The second benchmark is that the current account surplus should be of at least 3% of GDP. Current Account has three components i.e. good and services, income, and current transfers. The goods and services measure the exports and imports of goods and services, income accounts for the government’s income and spending on financial investments, and current transfers include one-way gifts and remittances made in the country.

If the sum of these three components is less than zero, then the current account is in deficit, and if it is greater than zero, the current account is in surplus. Currently, India does not have a current account surplus of more than 3% of GDP.

Read More: India Achieves Current Account Surplus: What Does It Mean?

Third Benchmark
The last benchmark is that the net purchase of foreign currency should not be more than 2% of the GDP of the last 1 year. According to the US, RBI has been excessively buying foreign currency, thereby intentionally devaluing the value of the Rupee.

  • According to the Bretton Woods system, each country had to adopt a monetary policy that maintained its external exchange rates within 1% by tying its currency to gold. It was established in the cold war era and dissolved in 1968-1973.
  • Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro, and other major global currencies.
  • The most valuable foreign currency is the Kuwaiti Dinar. One dinar is worth approximately $3.28 or ₹241.13.