The trading week that is coming to an end has brought the crypto markets not only a significant increase in volatility, but also a whole host of bad news. Meanwhile, not only the Fed and the Peoples Bank of China have big plans for the introduction of a digital dollar here and a digital yuan there – but these advances are not without criticism.
In the People’s Republic of China, whose political leadership publicly announced on Wednesday that crypto payments would not be accepted by officials in the Middle Kingdom in the future, a focus on the digital yuan, which is on the verge of a nationwide launch, has been emerging for some time.
Crypto fans in the focus of the American tax authorities
However, there were also reports in the U.S. during the past trading week that the U.S. Internal Revenue Service (IRS) wanted to put crypto investors through their paces, which means that anyone who has not yet paid taxes on trading profits in the digital currency sector can certainly dress warmly.
It can be assumed that crypto exchanges worldwide will not hesitate for a minute to transfer user data at the request of the IRS without batting an eye. Similar events had already occurred in the past, albeit arguably on a much smaller scale.
Fed chief recalls plans for digital dollar
And then there’s Fed Chairman Jerome Powell, who reminded American society these days to work on plans to launch its own digital dollar. According to Powell, the publication of a discussion paper outlining the likely impact of a digital currency technology that is developing at a rapid pace will occur later this summer.
The focus of this discussion paper would clearly be on the possibility of issuing a central bank digital currency in the United States. The Federal Reserve cannot and should not close its mind to these developments, according to a video message from Jerome Powell yesterday.
Rather, from the point of view of the monetary policy decision-makers in the U.S., it will be a matter of adapting in the future to the technological innovations and innovations that are currently transforming the world of payment systems, finance and the banking industry.
US leadership? China is far ahead…
Powell also indicated his intention to play a leading role in the development of international standards in the future. Anyone looking at the People’s Republic of China these days will see that the Middle Kingdom has a clear lead over the U.S. in this particular area, however.
The Bank for International Settlements (BIS) chart shows that it is not just the People’s Republic of China and the United States of America that are making progress in the field of digital currencies, in some cases major progress. Work is now underway to implement similar projects on all continents of the world.
How should integration into the existing banking system work?
From the perspective of the Federal Reserve and Jerome Powell, one of the key questions seems to be how the new transaction and payment technologies will be integrated into the existing banking system in the USA. Critics complain that low-income earners in the USA would be charged significantly higher fees for basic services by American banks.
Wealthy citizens, on the other hand, are not charged extra fees and various surcharges. For this very reason, digital currencies held by individuals could prove to be a new and serious competitor from the perspective of U.S. commercial banks.
However, unlike with regard to crypto exchanges, traditional bank accounts had a high degree of protection, which would benefit customers’ deposits at commercial banks. A less regulated system would not, per se, be able to provide a similar level of protection for the benefit of consumers, according to reports.
Digital dollar to be introduced alongside existing dollar
Jerome Powell made explicit in his video message that the potential introduction of a digital dollar would be complementary, not in any way substitutive, to circulating cash in the United States. Electronically managed customer deposits at U.S. commercial banks would not be affected anyway.
According to Powell, the introduction of a digital dollar would also be accompanied by a number of serious issues relating not only to the design of future monetary policy in the United States, but also to consumer protection, general financial stability, legal and data protection aspects, and respect for individual privacy.
One of the key questions revolves around current discussions, Powell said, about the ways in which the launch of a complementary digital currency could enhance an already very secure, efficient and dynamic banking and payments system in the United States.
Minus interest ahead? Is the digital dollar supposed to cushion a collapse of the system?
Critics of the Federal Reserve and Jerome Powell, on the other hand, argue that the current financial system is on the verge of collapse. For this very reason, the Federal Reserve is pursuing a plan to cushion this imminent crash through the foreseeable launch of a digital dollar by threatening to penalize the hoarding of monetary units or devaluing held monetary units at the push of a button.
The continuing zero interest rate regime alone would then contribute to a continuing devaluation, which in the case of the launch of a digital dollar (with the abolition of cash) could then also very quickly turn into a minus interest rate regime, in which above all savers would be put out of business.
Absolute doomsayers already draw parallels to that once by president Franklin D. From today’s perspective, a similar development could have equally catastrophic consequences for money holders, savers and precious metals investors, as physical cash and precious metals (and perhaps also Bitcoin) could be legally confiscated at a certain point in time in order to compensate for this form of savings with digital central bank money.
Powell criticizes bitcoin and co.
Which brings us to the keyword of the day called Bitcoin and other private cryptocurrencies. Despite admitting that Bitcoin & Co. had sparked a revolution in the field of digital currencies, forever changing the general perception in the field of accepted money, Jerome Powell did not miss the opportunity to verbally bash private digital currencies like Bitcoin & Co.
Referring to Powell’s statements yesterday, private digital currencies would not have proven to be a pleasant form in the field of payments so far. The immense volatility and volatility in this sector is primarily responsible for this, he said.
Powell insists on global leadership – stablecoins to be subject to oversight and regulation
Despite this immense volatility, however, it can be observed that cryptocurrencies such as Bitcoin and Ethereum have exploded strongly in price over the past weeks and months, even though massive corrections of up to fifty percent in the shortest period of time can also occur time and again – as in the course of the past trading week.
According to Powell, so-called stablecoins, i.e. digital units that are linked to the US dollar or other fiat currencies, have a whole range of advantages in the field of new payment systems. The technologies used in this area have the potential to increase payment efficiency in the medium to long term.
Powell went on to say that the speed of transactions could also be increased enormously in some cases in this way, while costs would fall from the point of view of end users. In this context, Powell pointed out that the associated risks should not be misjudged or ignored in their entirety.
For example, the Fed chief went on to say that while stablecoins may be pegged to the U.S. dollar or other fiat currencies, they would have to forgo similar protections guaranteed by cash or bank deposits. These matters would need to be addressed in the regulatory and oversight arena to give these operations the appropriate and deserved attention.
Finally, Powell shared that the U.S. would be a world leader in the development and adaptation of digital currencies. In order to develop international standards and implement them in this field in the future, the Federal Reserve will work with other central banks around the globe, he said.
What threats does a digital yuan pose to the U.S. dollar status?
Change of Scene. What is the current situation in the People’s Republic of China with regard to the digital yuan that has been discussed in many places? Over the course of the last few weeks, a whole series of observers and experts have spoken out on this topic, including Neill Ferguson, who, like other protagonists, seems to believe that the digital yuan could become a challenge to the world reserve currency status of the U.S. dollar.
Even in the White House in Washington, analyses are apparently being made these days that revolve entirely around what potential threats a digital yuan might pose from the perspective of the U.S. dollar.
The fears that accompany this could prove to be premature or even exaggerated. After all, as Bloomberg (linked above) reports, many users of digital currencies in the People’s Republic of China have so far not shown much interest in moving away from their currently used mobile payment systems, which are operated by the domestic Ant Group or Tencent.
Programmable expiry date & monitoring capabilities of the digital yuan leave Chinese skeptical
Over the past few years, these mobile payment systems have widely replaced the use of cash in the People’s Republic of China. According to Bloomberg, moreover, more than a few Chinese are upset by the fact that the digital yuan (renminbi) can have an expiration date due to its programmability. In other words, if you don’t spend your digital money by a certain date, you forfeit it.
On the other hand, many Chinese declined to provide the domestic central banks with a voluntary overview of their buying habits and real-time transactions.
What would be the impact of compulsory use?
Even if the Beijing government were at some point to force its domestic population to rely only on the use of digital yuans (renminbi) in the future, the question from the perspective of international observers is how such a development would affect international customers and companies, who are already skeptical about China’s capital controls and the state’s massive surveillance apparatus.
Perhaps this is one of the reasons why the yuan (renminbi) still only accounts for less than three percent of foreign reserves held internationally. It may well be the case that back in 2016, when the yuan was included in the IMF’s SDR currency basket, the general jubilation may have been premature.
China wants to push global use of the yuan – but West and East are decoupling
In the process, recent statements by China’s President Xi Jinping give the impression that the country’s Communist Party is harboring lofty ambitions regarding increased international use of the yuan (renminbi).
Part of the reason for this is to make the domestic financial system and the Chinese economy less dependent in the future on the world payments and world financial system still dominated by the United States.
The head of the international affairs department at the People’s Bank of China, Zhou Jun, had publicly indicated a few weeks ago that the People’s Republic of China was looking at a narrowing window of opportunity to push for increased global use of the yuan (renminbi).
In doing so, he said, the risks from the PRC’s perspective were enormous, as a continuing disconnect between the PRC and the West could be seen at nearly all levels, from trade to finance to the technology and investment sectors.
According to Zhou’s statement at the time, a nationwide launch of the e-CNY (digital yuan) offered a veritable opportunity to escape political and economic threats. Competition could threaten the e-CNY from Facebook’s digital currency Diem (previously Libra). Back in 2017, the People’s Republic of China banned crypto exchanges from its territory.
DepthTrade Outlook
It will remain to be seen whether Jerome Powell-type statements, according to which digital central bank currencies are to circulate complementary to cash in the future, will prove to be correct and true in the long run. The fact that China’s programmable e-CNY offers the People’s Bank of China the option of assigning an expiration date to digital monetary units does not seem to excite potential users and could lead to a politically imposed compulsion to use the e-CNY. Whether things could develop similarly in the West, meanwhile, remains to be seen.
