A Consumer Guide To Using The Digital Yuan And Digital Ruble

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Both China and Russia are ahead of the West in terms of developing digital currencies, while Iran has introduced the ‘Çovenant and other blocs such as the Eurasian Economic Union and BRICS are also discussing the development of specific digital currencies in order to trade.

Russia has submitted proposals for the Digital Ruble to its Central Bank, which is supportive of the idea, while Russia’s Sberbank is well advanced in launching a trial ‘Stable coin‘ for its clients linked to the Ruble. It is China though that is likely to take the first steps to introduce usage, it has trialed the Digital Yuan in Shenzhen, Suzhou, and Beijing and intends to introduce its use to foreign visitors to China and distribute them at the upcoming Winter Olympics due to commence this coming February. That has already raised concerns in the United States with senators warning US citizens and athletes not to touch them for fear of them being used for spying.

Recent measures by China to restrict cryptocurrency trading could stimulate a global re-formatting of the market. Many of them can compete with national digital assets, such as virtual yuan and dollars, backed by government guarantees, which will successfully use the existing infrastructure of the crypto market and receive support from mainstream investors. Such changes do not mean the end for Bitcoin and other major cryptocurrencies, which will maintain their niche position in the market.

In June, the People’s Bank of China said that “virtual currency trading activities disrupt the normal economic and financial order.” Such measures have caused many to think about the future of cryptocurrencies. The news lowered the bitcoin rate by 11%. According to various estimates, in past years, from 65 to 75% of the world’s bitcoin mining took place in China.

In addition to the restrictions, the Chinese authorities have begun introducing their own virtual money. In March 2021, they announced their intention to become the first country whose central bank will issue a national digital currency. The yuan “in numbers” is intended to become a third form of money, in addition to cash and non-cash forms, and to add choice to consumers. At the same time, the spread of the national digital currency is intended to further increase the impact on the current crypto market.

No Currency Speculation

The People’s Bank of China has promised to “strictly control” the exchange rate of the national digital asset and not allow a difference in value with paper money. Promises like these mean that it won’t make sense for investors and traders to speculate in digital yuan, as with current cryptocurrencies. It is worth noting that ensuring the liquidity of the national digital currency is not an easy task for any Central Bank. Russia can be expected to take a similar position. If it is not resolved, then the value of digital assets may ultimately differ from the value of fiat money.

Government Security & The Individual

It is important to understand that if the digital yuan, ruble, and similar currencies are built on a full-fledged blockchain technology, then there will be few technical differences from cryptocurrencies. Unlike these, the Chinese digital yuan will have functions for blocking account addresses, restrictions on the size of transactions, and linking account addresses to individuals and businesses. The digital yuan will also give the Chinese government extensive new tools to monitor both the economy and its own population. The Chinese authorities will be able to fully track any transactions using it – a situation that alarms the United States as this evades the US controlled SWIFT banking network – which broadly does exactly the same. However this does beg the question of what parts of the transaction are recorded – the value, or other data such as products purchased? Could a digital currency be used to restrict individuals wallets from buying certain products? Could a digital wallet holder find his assets confiscated under certain conditions, leaving them penniless?

Not the end for Cryptocurrencies 

Despite pressure from the authorities, crypto activists are somehow successfully adapting to new realities. In the past, China has banned local companies from issuing their own tokens, forcing them to move offshore. Although this complicated crypto trading, it has not stopped it. China’s efforts to combat the cryptocurrency market, which is seen as one of the main channels for withdrawing funds abroad, are largely doomed. Despite possible stricter restrictions, the same bitcoin will most likely continue to be used by the Chinese population, only more covertly and with trusted counterparties.

At the same time, Bitcoin mining is likely to simply be transferred to neighboring countries, and the income will continue to go to the Chinese. For example, after the ban on mining in China, many moved their “farms” to neighboring Kazakhstan.

Digital Finance & Global Investors

The introduction of the digital yuan, guaranteed by the world’s second largest economy, could fundamentally change the fundamentals of financing and the very market environment in the same way that Amazon completely changed the global retail industry. As a result, mainstream investors may finally reach the digital asset market.

The Chinese and Russian authorities perceive the introduction of their digital currencies as an attempt to consolidate leadership in the global digital asset market and a way to combat the hegemony of the US dollar, lessening the impact of sanctions. It will also reconnect to the global payments system and provide people from poor countries with the ability to receive or transfer money abroad without hassle. Even limited international use of such an asset could technically mitigate the impact of US sanctions, and especially on economies such as Iran.

Chinese and Russian leadership in digital currencies is likely to remain in place for some time. Despite their condemnation, Western countries have only just begun looking at the virtual currency market and appear uncertain how to adapt to the new realities of digitally managed, alternative currencies exempt from the existing US administrated global financial system.

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Silk Road Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Asia, and assists foreign investors into the region. For strategic advisory and business intelligence issues please contact the firm at silkroad@dezshira.com or visit www.dezshira.com