Source: AdobeStock / OlegKachura

As the Chinese government cracks down on decentralized cryptocurrencies and seeks to introduce its own central bank digital currency (CBDC), the digital yuan, industry watchers believe the move could pave the way for the adoption of CBDC-to-CBDC exchanges. At the same time, the digital yuan and other CBDCs to be introduced by other countries could affect the dollar’s status in global finance in the long term.

The projections were presented by Yaya Fanusie, Adjunct Senior Fellow at the US Think Tank Center for a New American Security (CNAS), who investigated the Yuan Digital Project. Speaking to blockchain analytics firm Chainalysis on its latest report on the Chinese market, the analyst said that the digital yuan is unlikely to pose a threat to the dollar in the short term as it will take time for Beijing to adequately promote its use outside of China .

So far, 35 Chinese banks have embedded digital yuan wallets in their mobile apps, while another 94 banks intend to access the Chinese CBDC through a new platform, Shanghai Securities News reported.

However, the introduction of the CBDC is likely to have a major long-term impact on global payments.

“I think they will try to find agreements with other countries where they will allow the exchange of CBDC to CBDC. Think of it as an atomic swap of CBDCs, ”Fanusie said.

Under this type of agreement, the report said, A in China could send digital yuan to B in Malaysia with an automatic currency exchange so that B can receive digital Malaysian ringgits and “without either party touching their non-native currency” .

These transactions would not rely on the SWIFT system, it said.

“If they became the norm, people outside the US would have to hold less US dollars,” the report said. Fanusie adds, “This is not a risk for 2022, but likely more for 2032 and beyond.”

Fanusie also sees the digital yuan as part of a larger data literacy war that is falling behind the US.

“So far, China has been more innovative than the USA with fintech. If this happens to blockchain technology as well, the US economy risks missing out on the next wave of data-driven innovation, ”the analyst said.

Rather than simply creating its own CBDC to mitigate this risk, Fanusie suggested that while a U.S. CBDC project shouldn’t be ruled out, Washington policymakers are thinking beyond a digital dollar and innovating in blockchain, fintech, and more Monetary policy must be promoted through organic growth rather than a top-down approach.

The promotion of innovation could be stimulated through partnerships between federal agencies and US universities to create a sandbox for the development of blockchain-oriented projects.

“This is how the US led the development of the Internet. There was an instruction for universities to create a computer network that the military could use. That infrastructure was then used for much wider civil uses and sparked a revolution in business innovation, ”concluded the researcher.

With Chainalysis, one thing is clear:

“China appears to have plans to develop a digital yuan for immediate domestic use and possibly future international use. Improved monetary policy and financial surveillance of Chinese citizens appear to be the short-term goals of the project, but the long-term goal is to spread the.” digital yuan along with other CBDCs could jeopardize the US dollar’s status as a world reserve currency. “

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