As the U.S. accelerates its printing press, China is already testing the digital yuan. Given this new reality, it becomes clear that the finance world will never be the same. But why do we need digital money? How is it better than traditional fiat money? What are the pitfalls?

The coronavirus epidemic has accelerated cryptocurrency’s exit process from the marginal state, and has firmly pushed it front and center into many more people’s consciousness than ever before. Today, the global economy needs a payment instrument with which you can make payments quickly, inexpensively and without unnecessary intermediaries, such as Visa or Mastercard, and it needs such an instrument now more than ever before. China is already testing its “digital yuan,” with the USA, Great Britain, France, South Korea and other countries working on similar steps, too. Already 20% of 66 central banks reported that they are likely to issue a CBDC within the next six years. With all of this action behind the scenes, it seems inevitable, in the coming years, that state digital currencies will become widely available to ordinary citizens. However, few people understand what this will change, so let’s explore how it will evolve in the not-too distant future.

What is happening and why is this needed

The Central Bank of China is launching the testing of its digital DC/EP (digital currency/electronic payment) in the cities of Shenzhen, Suzhou, Chengdu and Xunan. Four state-owned banks will be involved in the issuing of this digital  asset: Agricultural Bank of China, Industrial and Commercial Bank of China, Bank of China and China Construction Bank.

The Chinese authorities have chosen the easiest way to integrate digital currency - implementation through the social and budgetary sphere. Already in May, officials working in Suzhou will receive half of the transport subsidies in DC/EP rather than in traditional renminbi. To do this, they must install a special application on their smartphones - an electronic wallet that can be linked to an existing bank account. This new digital currency can also be used for payments at McDonald's, Starbucks, Subway and other popular chains. All this reminds us of how the Euro was introduced into circulation, which combined 18 European currencies. This, too, was not instantaneous and began in 1999 in a non-cash digital format.

The revolutionary nature of the state digital currency isn’t just that issuing digital money becomes cheaper since no special paper with watermarks and other security measures will be needed. The revolution is with Chinese authorities believing that “a sovereign digital currency” is an effective alternative to the U.S. dollar settlement system. It dulls the impact of any sanctions and mitigates the threat of a boycott both at the national level and at the level of private companies.

In addition, national digital currencies can actually accelerate payments, increase transaction volumes and thereby increase the level of GDP, which have fallen sharply due to the coronavirus pandemic. That is one example that American economists argue about concerning any future digital dollar. However, the introduction of digital currencies will change the economy at all levels: from global to personal finance.

Why payments and transfers will become cheaper

Today, we see a huge difference in how well known certain payment instruments in different countries are. For example, Russians are making full use of contactless payments such as PayPass, Apple Pay, and others. Meanwhile, the Chinese have long been accustomed to paying by QR codes and are actively “paying by their faces” - even in the subway. Then, we see Americans loving their Amazon Go stores, where they just pick up the goods they want and simply walk  out, secure in the knowledge their purchases have been tracked in store and the correct payment  will be debited from their credit card automatically. At the same time, residents of Germany, Italy, Spain, and Austria prefer cash, although they have no obstacles or restrictions on the use of other payment instruments, with various forms of contactless payments now available in most places around the world.

Digital currencies look like a logical continuation of this evolution, another tool that will simply be added to the list, but this is not entirely true. Unlike other payment instruments, cryptocurrency does not complement the existing financial infrastructure, but creates a new one - without intermediaries, and which is transparent and reliable.

When we pay for any product or service, an average of 1 to 5% of the money goes to payment systems as an acquiring commission. Cryptocurrencies - like QR codes - allow the buyer to pay the seller directly, which means eliminating the intermediary - like, Visa or MasterCard - and which will make goods and services cheaper. Already, there are marketplaces where users can directly pay with various cryptocurrencies.

Of course, payments using the state digital currency will not be free, but commissions will be significantly reduced. Their amount will be assigned by the issuer of a centralized digital currency, that is, by the state, and not by international corporations seeking to maximize profits at all costs.

Who will control whom

Digital currency is not only money in the usual sense, but also a technology that is ideal for providing the state with financial resources. To put it simply, the introduction of a state digital currency can increase and simplify tax collection up to 100%. In parallel, of course, the state will receive a large amount of data about its citizens and their finances, for which centralized crypto technologies are often scolded. However, the transparency that the blockchain provides also works in the opposite direction.

Cryptocurrency technologies allow you to control not only citizens, but also the state, allowing you to track where each budgeted ruble, dollar or yuan has been spent. For example, did all the allocated $16 billion really go to fight the coronavirus in China, or did part of it go astray, landing instead in completely different accounts? Using digital currency, targeted social assistance will also become truly targeted, and commercial banks and payment systems will not be able to receive their percentage from such payments.

Digital currencies offer even more opportunities if they are freely convertible. In this case, they can be used for global settlements and indeed weaken the dependence of national economies on the US dollar, which, apparently, is what the Chinese expect in the future.

What is the catch?

Despite all the advantages, states are ambivalent about the topic of digital currencies. This is especially so, if these currencies, at least theoretically, want  to become globally recognized and a new standard of their own. Think of how hard Mark Zuckerberg has tried to advance Facebook’s digital currency Libra, once supported by so many partners, but since abandoned by many, including Paypal, Mastercard, Visa, eBay and Stripe. Libra’s hope for survival now rests on the appointment of Stuart Levy, a former senior US Treasury official as Libra’s new CEO, but whether he will end up making a real difference is yet to be seen. 

Global competition and the protection of private and national interests are still of high importance, so the issue of "authorship" of money and control over it is really very important. If a private company becomes the issuer of state digital currency, it may pursue its own commercial interests. There is also a risk that the company’s employees may create some kind of vulnerability, which, for example, will lead to data leakage in the future. And who knows what will happen if the company changes owners? A striking example is the scandal with Crypto AG, which has long been one of the leaders in the encryption market. As it turned out, in the middle of the 20th century, it was bought by American and German intelligence services, which allowed them to read secret correspondence between governments and intelligence agencies of other countries for decades. In the case of money, it would be like a nuclear explosion. That is why private  corporations cannot be trusted with state issued currencies. 

For the state to be able to launch its own digital currency, the mere desire to maintain a monetary monopoly is not enough. Central banks should become technology companies. This is a serious challenge, and as such, states are in no hurry to launch digital currencies before they are convinced of the availability of everything necessary - from advanced technologies to a reliable team of professionals able to provide as secure and reliable an infrastructure as is possible, given the entire economy will be depending on it and given hackers will be trying to penetrate the system. However, given how actively different countries are now considering the possibility of following the example of China, dozens of national cryptocurrencies will become available in the very near future.