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Crypto, the New Money and Financial World Order!

Crypto, the New Money and Financial World Order!

The global financial system and world order is currently dominated by the US dollar since overtaking the Pound which dominated at the peak of the British Empire. While contenders like the Euro have failed to offer an alternative especially after the exit of Britain, the currency seemed to grow stronger in domination. In China, there have been plans for the Yuan to replace the USD as the world’s domineering currency for China to better control its economy. Since being awarded as a reserve currency in 2015, the Yuan joined Japanese yen, British pound, and U.S. dollar in the IMF’s Special Drawing Rights basket.

However, a change is looming and this time round inside technology worlds because the next dominating reserve currency could be a digital one. The starters in the race are totally different this time around. While China is way ahead and has started piloting the digital version of the Yuan, the U.S. plans for a digital currency are only in the Federal Reserve committee stage.  

China, which has been developing a digital currency since 2014, does not currently need to show that their digital currency is a weapon against the U.S. dollar, China central bank Vice Governor Li Bo told a conference in April this year. But there is no doubt those issues will be there when the United States finally rolls out its digital version of the dollar.

Why digital currencies are a new normal for the financial system?

After several years of denial and resistance, because top leaders had huge interests in the legacy financial systems they helped to structure, build, and stabilize, there is a sizeable change of heart. Most new and experienced leaders alike now agree that the concept of legacy financial systems is outdated, costly, and slow. There is absolute consensus that it needs to be replaced. And while the debate dwelt a little bit on how it would be replaced and what could replace it, now there is further consensus that digital currencies are the way.

Currently, if you do not like El Salvador's making of Bitcoin their legal tender for they foresaw the possible manipulation in a new central bank digital currency-led global economy, you might see the digital version of Yuan being tried currently as more preferable. Although the World Bank has warned of countries making Bitcoin and similar cryptocurrencies as legal tender, more countries could likely follow El Salvador’s steps in the new wave to digitize their financial systems.  

There is no notable proof that the United States had contemplated a digital currency. If so then it may never have actualized anyway, but now the spanners are in the works for a digital dollar that could free up the U.S. economy further.

Although it could initially operate beside the current physical and money forms, it may later replace them totally. Already the case for the digital dollar seems solid with Federal Reserve saying that it will release a report on the same this coming September. It is expected that the United States could finally have a digital dollar given the huge support for it during Senate and FED committee meetings and hearings.

The digital dollar, according to proponents, will reduce costs, fast up transactions, and enhance monetary function and programmability. It will provide increased access to banking services to millions of unbanked and under-banked Americans. It will do so mainly by decreasing banking fees and eliminating the need for most account application paper works. Now that bank-lite digital wallets are the way to go for many young Americans, the digital dollar – not the version we know it -- but a tokenized version issued through the central bank, could align with the investment and spending needs of these young people.   

By decreasing costs for both consumers and businesses, it will put more money into the hands of people and businesses. For instance, it will decrease transactional costs and eliminate most of the stress in overdraft and money transfers.

Outside the U.S., renewing the entrenched nature of USD as a reserve currency is not easy. There is no doubt that digitization is expected to rather establish further the reserve currency globally. Some argue that the U.S. dollar is already established as a primary reserve currency and needs no innovation.

However, a new digital dollar could actually introduce new functionality of the new money and ease use while still preserving the traditional dollar’s competitive advantage. To do that, it will need to be stable, be backed by a robust economy, established through good governance and openness, and governed by a rule of law. Much is yet to be seen on how the digital dollar will look like.

With improvement in the current digital monetary system through a tokenized dollar, it is expected that financial data will be more secure for individuals, groups, corporations, and governments on a global scale. It will definitely make it easier for countries and corporations to collaborate to defeat digital financial crimes especially with the reduction of cash systems. There is no doubt that financial systems will be faster and cheaper to transact on a global scale than they are.

There is no doubt many economies would follow that route to developing their own digital national currency versions. In fact, most are already doing so. The fact that they will follow after the example of the United States will definitely multiply the chances for the dollar to remain a primary reserve currency. However, a digital central bank currency could encourage a resurgence of the Euro itself as a dominating regional currency. Already the European Central Bank is into research and working on a central bank digital currency.  

How exactly will central bank digital currencies encourage the use of cryptocurrencies?

Cryptocurrencies like Bitcoin will operate alongside blockchain-based CBDCs is the most likely outcome. Given the high acceptance in business, decentralized applications, even those with self-hosted tokens, are likely to grow in usage. In fact, CBDCs are likely to encourage the use of cryptocurrencies because of several reasons.

There is a huge concern that CBDCs or central bank-led and governed digital currencies will multiply the possibility for better surveillance by the government. It will be expected to be similar, in this way, to the centralized accounts-based systems run by corporations and commercial banks and supervised by governments through central banks. And while a digital currency could make it easier for the embedding of privacy rights and free social norms into digital forms of public money, the war will likely be easier to lose than win.

Being not peer-to-peer, CBDCs will propel the goals of middlemen to control the economy. In fact, it could be several years before a digital dollar is finally totally deployed on the current monetary and financial system. That means most individuals will have the option to refer to peer-to-peer systems. Inside of cryptocurrency economies, even the centralized platforms have preferred decentralized peer-to-peer systems that will, with no time, prove cheaper and faster even than CBDCs.   

Being based on blockchain, these CBDC are also likely to increase interoperability between fiat and other cryptocurrencies like Bitcoin than do current fiat systems. For instance, it could be, at the end of the day, easier to trade and exchange Bitcoin and other cryptocurrencies to digital fiat, etc. Privately issued digital currencies are also likely to continue advancing their major goal of decentralization. Decentralization is largely in the trial stage but it is not about leaving control to a few private operators, coders, and miners. 

When it comes to participating in the economy, the main issue is also about distributing decision-making in a financial system. Cryptocurrencies will continue to serve that need while encouraging distributed participation through staking and mining in which participants can earn money by participating in the projects. Additionally, privately issued cryptos have played a huge role for people who trade and are growing both as investment and price speculation products. Many more people are going to become interested in cryptos as adoption and publicity about them grow.   

Competition for dominating digital currency is already on

The digital Yuan is so timely for China from an international political standpoint. It could be an important tenet for China to attempt internationalization since the days of the dim sum bonds and currency swaps, for instance, were used by China to accelerate internationalization.

China wants to use the central bank-controlled digital currency as a national currency but also as a way to modernize its global international payment systems. It will do everything that the banknotes and coins do. The currency is being tested in several cities including Suzhou, Shenzhen, Chengdu, Xi'an, Beijing, and other major cities. According to Li Bo, the People’s Bank of China (PBOC) will continue expanding the pilot program and could even allow foreign visitors at the Beijing Winter Olympics to use it.

Currently, the USD is still the primary medium for international transactions in China. But while China has not succeeded in domineering in fiat money, it leads on many fronts regarding the establishment of digital currencies. The rush for digital currencies, especially the central bank digital currencies, could see a new world financial order that is not dominated by the US dollar.

However, many like ex-secretary of the Treasury Henry M. Paulson Jr. do not think that the digital RMB is a threat to the US dollar more than is the RMB itself. That the domineering currency is decided by political systems which influence a reserve currency’s fundamentals, demand for the currency, and the relative openness of the political systems.

To replace the dominance of the USD as the new money dominating reserve currency, however, will depend on how the digital currency helps play these roles in the new way of making and distributing money.

There is no doubt the digital Yuan is better in many ways than the traditional Yuan in helping China in that. First, it could be propelled by the increasing adoption of tech standards globally. There are many reasons many African countries have been favoring China as a popular development partner. There has been heightened inflation in these economies amid several failed attempts to devalue home currencies. This may offer more incentives for African and other global economies to consider alternatives to the USD as a reserve currency. This is so if the digital Yuan can interoperate between different African systems or other Belt and Road Initiative Partners according to Roger Huang, a crypto and blockchain contributor and Forbes. In the event of the Chinese alternative, these countries are likely to continue questioning the value of holding USD dollar debts even as their economies continue collapsing. 

Besides, Chinese companies like Huawei have won several state-enforced patents and control of 5G technologies, which could propel the adoption of the digital Yuan outside the country. By winning the war to defining the digital value for the majority of the world, then the digital Yuan could easily sail as a dominating reserve currency by way of increased demand and influence. Locally, rolling out the digital currency through multinationals like Alibaba may help save face for a totalitarian government because people will find it more acceptable to trust these companies to use the currency than the government itself. China is piloting digital currency through these companies.  

Can the change in systems help the digital Yuan dominate among the four reserve currencies? It will also depend on how well the digital dollar also replaces itself in the new financial world order as the dominating reserve currency. It will also depend on how other countries align with those goals. Nevertheless, digital currencies are expected to be the new normal in financial systems.   

In conclusion, there is no doubt the United States is interested in establishing a digital currency that could better replace the dollar, not just as a national currency, but global currency. A lot is to be expected in the future even as the ground works for establishing such a currency, and international politics have begun. China is already ahead and is expected to seek to establish its digital Yuan as a more competitive reserve currency than it is now.  

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