What’s up, USA? China starts promoting its own cryptocurrencies and yuan

The confrontation between China and the United States in the technology sector is gaining momentum. Initially, it was artificial intelligence and now it’s time for cryptocurrencies. The first crypto President of the United States, Donald Trump, promised to make the country a leader in this market. But so far, all he has managed to do is cause serious volatility. And also to make Eric Trump, one of the president’s sons, Metaplanet counselor, the largest corporate bitcoin holder in Japan.

And now China is entering the game. At first, it was rumors that it is secretly working on creating his own strategic bitcoin reserve.

The Chinese media published an article by Zhang Ming, deputy director of the Institute of Financial Research of the Chinese Academy of Social Sciences, deputy director of the National Laboratory of Finance and Development. In the article, he says that it is time for China to pay attention to the US stablecoins and take measures against this threat.

Stablecoins pegged to the US dollar dominate crypto trading and decentralized finance (DeFi). Many people in countries with weak national currencies use them as a means of saving. Zhang believes that these digital assets can further strengthen the US dollar because they link the real dollar’s credit to the virtual economy.

Zhang suggests developing central bank digital currencies (CBDC) in China, as the digital yuan is currently limited to use cases. And also to promote the development of Chinese stablecoins: to expand the use of digital tokens of Internet platforms, combining the sovereign credit of the yuan with global scenarios for the use of Chinese platforms. This will help raise the international currency status of the RMB. In addition, at the level of the International Monetary Fund (IMF), the testing and promotion of digital special drawing rights (e-SDRs) could be encouraged. The Special Drawing Rights (SDR) is a supranational currency created by the International Monetary Fund, pegged to a basket of currencies consisting of the US dollar, euro, yuan, yen, and pound sterling. The current ratio is as follows: 41.73%, 30.93%, 10.92%, 8.33% and 8.09%, respectively.

In his article, the author also mentions that there are three main types of digital currencies: cryptocurrencies, stablecoins, and central bank digital currencies (CBDCs), such as the digital yuan e-CNY. They have their own characteristics.

1. The value of cryptocurrencies is determined not by government sovereign credit or other currencies or financial assets pegged to this currency, but by a computer algorithm. The number of bitcoins is fixed and set by the algorithm at 21 million. Currently, there are about 19.8 million bitcoins in circulation, which means that only about 1 million remain to be mined. The most important characteristic of bitcoin is its decentralization; its creation is not linked to the credit of any state. Given its fixed volume, similar to gold, it can overcome the inflationary tendencies of any central bank, which is why it is considered a tool for hedging currency risks. The biggest problem with bitcoin is the significant fluctuations in its price.
2. The value of stablecoins is determined by other currencies or financial assets to which they are pegged. Currently, the most popular stablecoins on the market are USDT and USDC, which together account for about 90% of the total market capitalization of stablecoins in the world. USDT and USDC are pegged to the US dollar at a 1:1 exchange rate, so they are also called dollar stablecoins. In addition to them, there are stablecoins pegged to the euro, gold, cryptocurrencies, and a basket of goods. To issue one unit of stablecoin, you need to have a fixed amount of currency or financial assets as collateral. Thus, compared to cryptocurrencies, whose prices fluctuate greatly, the value of stablecoins is much more stable.
3. Central bank digital currencies. These are digital currencies issued by the central banks of specific countries, backed by the country’s sovereign credit and pegged to the currency of that country in a 1:1 ratio. The biggest advantage of central bank digital currencies is that they are issued by the country’s central bank, and in case of significant fluctuations in their value, they can be supported by the lender of last resort function of the central bank, so the financial risk is very low. However, if the exchange rate of a country’s conventional currency fluctuates greatly or its purchasing power depreciates rapidly, the attractiveness of the digital currency of that country’s central bank becomes weaker.

Although bitcoin is a type of digital currency, it cannot truly serve as a currency due to its significant price fluctuations and limited quantity (it is difficult to use as a currency to regulate the economy). Under normal circumstances, as the economy grows, the country’s central bank will constantly issue new currency to meet the relevant needs. Bitcoin is not a real currency, but a financial asset with unique characteristics that has investment value. Given that bitcoin’s price trend is largely negatively correlated with the trend of the US dollar, it also looks like a protective asset that can hedge against fluctuations in the dollar.

Source: Weixin