Central Bank Crisis: Why China Upgrades China with a Digital Central Bank Currency | BTC-ECHO
The US and China are caught in a trade conflict that is worsening. However, punitive tariffs on cars and other goods represent only a secondary scene. First and foremost, it is about the issues of inflation, interest rates and the external value of one's own currency. In short, a trade conflict is always one thing above all, namely a monetary conflict.
The fear of the big bang
At the forefront are the respective central banks: the US Fed on one side and the Chinese People's Bank of China (PBoC) on the other. Instead of rockets, both sides are threatened with interest rate cuts and a corresponding devaluation of their own national currency. The much better maps, however, have the USA. Not only are all sovereign debt issues in their own country or global reserve currency, but China is also the largest creditor in the USA. An expansionary American central bank policy thus not only ensures greater competitiveness of its own companies, but also reduces the intrinsic value of Chinese claims.
In addition to a dangerous monetary policy, further risks threaten to cloud the economic outlook. Thus, the Chinese real estate bubble is taking on ever more dangerous traits, at the same time enormous debt of the companies. In addition to high vacancy and horrendous purchase prices in the metropolises, the assets are only slightly diversified.
This means that around three quarters of China's private capital is tied up in real estate. If the bubble bursts, it would plunge the Chinese economy into a massive recession and destroy private wealth. More and more Chinese investors are therefore seeking to convert their assets from the Chinese yuan into other assets and currencies. So the current economic situation. But what role does a digital central bank currency play here?
Realpolitik is central bank policy
Against the background of increasing risks, it is important to be able to carry out a determined, even aggressive and possibly innovative monetary policy as a central bank. In an economic crisis, one must be able to act quickly and counteract. A digital central bank currency – English is the name of a Central Bank Digital Currency (CBDC) – which can take advantage of the technical characteristics of the blockchain, is in many respects superior to the traditional central bank infrastructure. Key benefits include greater resilience, faster and more agile governance, greater control, and more automated and data-driven transaction processing and decision making in monetary control.
For example, the following motives might prompt the Chinese government or central bank to issue a digital central bank currency this year:
Bypassing the Western-dominated banking system
Be it the SWIFT clearing house in Belgium or the existing correspondent banking system: the current financial infrastructure is still strongly Western. For cryptocurrencies, on the other hand, there is no need for a bank account and access to and access to the existing banking infrastructure. Accordingly, dependencies on existing infrastructures and possible US sanctions can be reduced by using digital currencies.
More control and more accurate analysis
Corresponding to the abolition of cash, a digital central bank currency can enable a more effective tracking of payment flows, ie real-time tracking. As a result, the state not only has better opportunities to perform data analysis, eg. For example, to predict inflation, but also to control domestic transactions to an even greater extent. In addition to the cost savings that a cash abolition would entail, the fight against money laundering and illegal activities would also be improved.
Integration of Smart Contracts and Artificial Intelligence
The digitization of money not only enables more data to be effectively collected, but also enables smart contracts to have a higher degree of automation. Perspectively, such a central bank with its existing tools can react faster and more successfully to the market environment. Cure for: What hedge funds like Bridgewaters Associates are already using successfully today can help states at least as well: the meeting of more computer-aided than human, manual decisions.
Effective crisis management
If it bangs, because, for example, the Chinese real estate bubble has burst, it all depends on seconds. Just remember the market reactions that took place on September 15, 2007, when US bank Lehman Brothers collapsed. A crypto-central bank system, which is based on fewer manual processes and can be used in seconds, can provide liquidity more quickly. Chinese banks could be flooded with liquidity in no time. At the same time, immediately implemented capital controls, via smart contracts and not manually, could immediately prevent a capital outflow of domestically committed capital. So you can pull the ripcord faster and more consistently, initiate countermeasures and change the monetary policy rules, at least from a technical point of view.
Better interest rate management
Better interest rate management can be pursued as the digital central bank currency replaces M0 and no interest payments are made. Specifically, this means that banks who park their capital with the Chinese central bank, and not with another financial institution, also do not receive interest on their central bank coins.
Counterweight to Facebook's Libra
As former Chinese central bank chief Zhou Xiaochuan said in August, the Libra cryptocurrency project is seen as a threat to the Chinese yuan and the financial system. Accordingly, there is a great need to oppose foreign cryptocurrencies from the Chinese side.
Just as most American companies act as junctions in the Libra payment network, Chinese companies are expected to play a supporting role in the Chinese central bank currency. Although not validators, Alibaba and Tencent, among others, should help to distribute the state cryptocurrency. It is also about a race, international recognition and adaptation in emerging markets.
Finally, both Facebook's Libra and Chinese expansion plans target emerging markets. Especially in Africa, China invests billions of yuan and is gaining in influence.
The most centralized blockchain project ever
Basically, it is very questionable to speak of Blockchain in the context of the planned Chinese cryptocurrency. After all, only parts of individual layers – and even under certain circumstances – should correspond to a private blockchain. The complete and unrestricted control should lie with the Chinese central bank – so no trace of decentralization. It should also be possible to handle up to 300,000 transactions per second. A scaling that a decentralized Blockchain state would never achieve today.
That is not necessary. It would be a contradiction to the concept of a central bank – the name already suggests – to have a truly decentralized governance. This is all the more true of an autocratic and ultra-centralist state like China.
The central bank's crypto project is less driven by intrinsic innovation enthusiasm. Rather, it owes its consciousness to being able to effectively act in realpolitik in the conflict with the US and in the wake of imminent economic crises and to be able to exploit all available monetary policy options.
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