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Why China competes with Bitcoin with its own cryptocurrency

The decentralized crypto currency Bitcoin is currently making headlines - because central banks keep increasing the amount of money through new debts, the price of Bitcoin, which is limited to 21 million, is apparently increasing inexorably. But behind the scenes, almost all central banks in the world are working on their own cryptocurrency. Above all the People's Republic of China.

Beijing is now working with the central banks of Thailand, the United Arab Emirates and Hong Kong. The project aims to explore cross-border payment transactions. Blockchain technology is to be used for this. It is the first major field test of this type for government cryptocurrencies.

Digital lottery win

Beijing had already started pilot projects in the past few months. For example, lottery players in the cities of Chengdu and Shenzhen were paid out their winnings in the form of the new digital yuan. The winners were able to download the digital yuan via an app and then spend it at around 3,000 retailers.

From a government perspective, a state digital currency has several advantages. At present, governments and central banks can only influence economic events indirectly. If a central bank cuts interest rates, for example, it is in the hope that companies will call up more credit and thus the economy will get going. In the current economic situation, however, this works less and less: interest rates are close to zero and in some cases are already in the negative range. Even so, the economy does not start. A large part of the money simply flows into the financial markets instead of developing productive forces.

With a digital yuan or euro, politicians could intervene in economic activity in a much more targeted manner. For example, a one-off payment to certain citizens to stimulate consumption is conceivable. So that this actually works, i.e. the recipients actually spend the money and not just save, money that has not been spent could be automatically debited again within six months.

Intermediaries become superfluous

Another consequence of a digital currency, which has not yet been fully thought out, would also be that traditional banks would largely become superfluous. Intermediaries would no longer play a role between the consumer and the central bank.

For Beijing, digital currencies have another use: For years the Communist Party has been trying to attack the dominance of the US dollar as the reserve currency. For example, if China buys oil from Saudi Arabia, the deal is done in US dollars. Around 80 percent of all foreign exchange transactions currently take place in US dollars, while the American economy is only responsible for around a quarter of global economic output.

Detour via US dollars

This in turn gives the USA advantages: The demand for US dollars worldwide therefore always remains high, while the country can get into debt abroad. If such transactions are carried out with digital currencies in the future, the USA will lose this privilege. The detour via US dollars would then no longer be necessary.

Last but not least, a centralized digital currency like the one Beijing is planning enables seamless monitoring of its own citizens. Every transaction would then be visible to the government. Payments classified as illegal can be stopped immediately. The threshold for this is low in China. Cash has already largely disappeared from everyday life in China. Whether in a restaurant, supermarket or taxi - you can pay with the Alipay or Wechat Pay app. Beggars are said to have been seen asking for alms via QR code.

Bitcoin banned

Trading in Bitcoin, on the other hand, has been banned in China for years. Because while a "Central Bank Digital Currency", or CBDC for short, enables total monitoring, this is exactly what the decentralized nature of the Bitcoin network prevents. In addition, an algorithm limits the absolute amount of Bitcoin to 21 million, while CBDCs can be multiplied indefinitely. (Philipp Mattheis, February 25, 2021)