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While financial markets have become increasingly captivated by Bitcoin and other cryptocurrencies, behind the headlines another perhaps even more important development is emerging: China’s plan to create a digital currency. There are two main reasons for China’s digital currency push: To monitor and control financial transactions more closely and to weaken the US dollar’s dominance of the global financial system, as reported by the National Bank of Canada.

China is hoping that the creation of a digital currency will help address to transform the yuan into a widely used international currency

“For starters, a digital currency would strengthen China’s already formidable surveillance powers. For example, it would permit the government to track and potentially block financial transactions in real-time. Digital currency makes it possible also to implement more tailored economic measures. Finally, it will permit China to curtail the influence of Ant Group and Tencent, which control a combined 94% of China’s online payment market. China’s digital currency could therefore be designed to move from A to B without intermediaries such as online payment systems.”

“On the international front, China hopes to create a payment system that cannot be disrupted by US financial sanctions and that elevates the digital yuan on the world stage. However, China faces major challenges in trying to increase the global use of its currency, digital or otherwise. The most significant being its capital controls, which keep a lid on outflows. There are also doubts whether assets would be adequately protected under China’s legal system. Some countries also fear that switching from the dollar to the yuan would only increase China’s influence over their economies. China will likely attempt to overcome these challenges by offering greater market access and loans to countries in exchange for trade being settled in digital yuans instead of dollars. The greater the economic ties with China, the more intense the pressure that countries will face to switch currencies.”

 

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