China's digital currency
How is a digital yuan shaping up to be
In China, nearly 86% of payments are now digital, occurring
mostly via mobile phones. The whole transaction happens with a click of a
button, a fingerprint scan, or even using facial recognition. The digital Yuan
is not a cryptocurrency, instead it is issued and managed by the Chinese
central bank just like its fiat currency.
China's Early Adopters
Still in its early stages and trials, the digital currency
has one reason to exist, to create a cashless future. The difference between
the digital currency and current electronic payments is that this currency will
be directly transferred in or out of your electronic banking wallet, unlike the
traditional e-banking system where an individual's funds get deducted from
his/her account value. On another note, a digital currency does not need to
have paper banknotes to back up its true "theoretical" value, however a digital
Yuan will be virtually created.
Economic Impact
Chinese economists are analyzing how the digital currency
can affect their rising economy. The possible economic consequences of using
digital money are shifting global investments, eliminating the "middlemen",
encouraging overseas transactions, and removing the barriers to entry on
international businesses. The inauguration of a digital Yuan will undoubtedly
affect the banking industry and its underlying operations because it aims at
excluding many financial intermediaries from a transaction. The Chinese virtual
currency is expected to account for nearly 16% of all consumption transactions
in the upcoming years. The main advantages a digital currency imposes are
increasing the speed of domestic and international transactions and reducing
the costs of these transactions. Global trade transactions will occur much
faster and will save the hidden costs and burdens associated with traditional
transfers. This in fact will boost global trade and remove the barriers of
entry on creating global businesses that can work together remotely, as any
transaction will be fast, transparent, and secure. While a digital currency is
desirable to many, it also imposes many risks on our current operating models
in many industries. For instance, there are many concerns on data control,
privacy, operational risk, and regulation. Cybercriminals are more drawn to act
on digital currencies and hack electronic wallets due to its virtual
characteristics, vulnerable identity, and lack of security and regulations.
China is addressing and dealing with these factors now to secure its citizens
and monetary system.
US & China Impacts
There are several factors that affect the value of a
currency relative to other major currencies. A digital Yuan might highly be
affected by the ongoing US - China trade war. If more sanctions come into play,
the initiation and management of such a digital currency might be non-viable
with stricter sanctions coming from the US. Although a Biden administration
will not end the trade war completely, it would still give the Chinese central
bank much ease to create and succeed with its digital Yuan.
What does it mean for Investors?
Traders and investors are overwhelmed with the idea of how a
changing monetary system might affect the current financial market. In fact, a
virtual currency will probably be an important milestone to the development of
capital markets. Due to the ease of transacting the currency, liquidity will
surely increase across all markets which in fact is associated with less risk,
as there will be more participants willing to take the opposite side of your
trade. This attracts more speculators and traders to the field, which
unquestionably adds value to the current market conditions. A possible trading
opportunity would be to go long on the Yuan, as China is exerting its strongest
efforts to challenge the US dollar for financial supremacy.
In Summary
Thus, despite if the digital currency comes out soon or not,
cash will not disappear for the short term. The decision to replace paper cash
with a digital one is a market choice more than a government ordinance. A virtual
currency will surely allow for more individual freedom and seems more relevant
to investors and businesses. Ultimately, the rise of the Yuan will serve China
well, as faster global transactions and lower fees will aid emerging markets to
develop and prosper for the long term.
