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Digital Yuan–yet another weapon in China’s arsenal to break the US dollar’s dominance

Is the world moving towards digital currency?

The world of digital currencies is warming up. Earlier this week, Prime Minister Narendra Modi launched India’s homegrown digital currency–e RUPI. China, which has been working on this space, has already done a soft launch of its digital currency.

Though several other countries including Japan and Russia too are moving fast on launching their own digital currencies, Bloomberg reported that US President Joe Biden and his team have already increased their scrutiny over China’s progress towards its digital yuan “amid concerns it could kick off a long-term bid to displace the dollar.”

China, so far, is the biggest supplier of goods worldwide.

“Beijing has touted the digital yuan as a futuristic currency that will make buying things more convenient and secure. Officials also say that it could help those who don't have access to bank accounts and other traditional financial services,” a report by CNN said.

Also read: India now has its own digital currency–eRUPI: What does this mean?

Experts are unanimous in their opinion that China, with its digital currency, wants to break the dominance of the US dollar though a Carnegie Endowment for International Peace study said that the widespread domestic rollout of the e- Chinese Yuan would align with Beijing’s push for “financial security”.

“For China, this entails not just the detection and mitigation of financial risks but also the fusion of efforts by state security organs such as the Public Security Bureau with those of financial regulators, the study said.

The study highlighted that in 2019, President Xi Jinping endorsed enhancing financial security through “controlling people, watching money, tightening the system firewall.”

TechWire Asia said that unlike other e-payment systems, China’s ‘Digital Currency Electronics Payment’ will be centralized and state-run. “Beijing will be able to monitor how money is spent in real-time and have the same controls over DCEP as with the yuan,” it said.

A digital currency, issued by central banks and is known as “central bank digital currency” or CBDC, facilitates cashless payments and can be undertaken by smartphones or electronic cards.

To make the currency globally more accepted for trade, China may have to wait. Why?

Also read: US derails Beijing’s dream to become a tech superpower by targeting semiconductor giant

“The Chinese currency is not market driven and therefore it may not be easy for China to make a major breakthrough with its digital currency,” DK Srivastava, EY’s chief economic adviser told India Narrative. That apart, as the geopolitical narrative changes rapidly along with rising tension between the US and China, most countries may not want to switch to the new payment mechanism.

“In the near future the impact of the e-currency on the global economy and trade will be negligible. However, its usage would facilitate the Chinese authorities to tighten their grip over spending in the country,” another analyst said.

The analyst added that India’s launch of the eRUPI gives a clear “early mover’s advantage.”