China’s electronic payment system for digital currency is at the forefront of news about the central bank’s digital currencies or CBDCs. Since China will be the first country to launch a digital currency in the central bank, the changes that the digital yuan will bring to the global economy and the role the plan plays in waging a currency war project keep in the headlines.

For its part, the proposed currency is not only a threat, but also aimed at threatening the US dollar and possibly removing it from its place, which ranks first in the world’s reserve currency. However, to understand how well the digital yuan has succeeded in this endeavor, it is important to understand the current hierarchy of reserve currencies.

About the topic: China and the US should learn from each other and work together on CBDC currencies

Global influence
The two countries have been fighting for the status of the world’s reserve currency since the 1550s. The situation has serious advantages: countries that act as reserve currencies not only have lower business costs due to lack of foreign exchange costs, but usually also have access to lower borrowing rates. Although this increases the supply of capital for further expansion, it can also backfire when these loans are announced. Most importantly, since lenders can exercise their power through sanctions and tariffs, they have significant political power around the world.

The US dollar has been the global reserve currency since the 1920s, after the First World War, and now, 100 years after the creation of the reserve currency, tensions are rising over its dominance. Many countries are tired of living under US rule, and their history is on their side, without a global reserve currency that has been able to hold its positions for over 111 years.

China has been at the forefront of the dollarization process for many years. Given the yuan’s rapid growth in global markets from 12th to 4th in just three years, it could pose a serious threat. Now the yuan still plays an important role in world finance, but it remains separate from the state of global reserves with a large gap. According to the International Monetary Fund, 61.99% of global reserves in the first quarter of 2020 were held in dollars, while only 2.02% in yuan.

However, any major move to undermine the dollar will have far more impact than just the United States, where currencies sit between the yuan and a particularly high position to feel the impact.

Related: Digital Cold War? The United States and China are fighting for blockchain supremacy

Will the digital yuan be enough?
While everyone is paying close attention to the currencies of the Chinese central bank, few believe that this will be enough to empty the dollar. However, this does not mean that it will not worsen both the dollar and the euro – the two most important currencies today.

The central bank’s digital currencies, among other advantages, offer faster and cheaper transfers and programmability. If trading can be simplified and cost cuts in new currencies, there is no doubt that invoicing in the central bank’s currency will follow. While the credibility of this new technology still needs to be increased, a successful launch can quickly increase the ranking of reserve currencies. Since China is far ahead of any other major economy in launching its digital currency, the digital yuan is worth considering.

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Despite the benefits the CBD promises to China and China’s use of its position as the world’s largest exporter of increased consumption, the yuan still faces many obstacles to dominating global markets.

The first obstacle to the yuan is the huge difference between it and the dollar. However, given the rapid understanding of the renminbi and China’s position as the world’s largest exporter, the currency’s ability to make large leaps should not be underestimated. In addition, with growing political instability in the United States and high unemployment, the impact of COVID-19 and other crises could be significant for this superpower.

However, another major challenge facing China is political. While the country’s efforts to bring down the dollar inherently are a political effort to improve the quality of life in order to reduce the risk of a new revolution and reduce US political influence, the worldview of the Chinese government is uncertain. . …

Source: CoinTelegraph

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