China’s crypto is all about tracing

The coronavirus has disrupted the world in very large ways. While that battle has been waged, however, another event has almost been missed: the birth of a new kind of fiat currency, which could forever reshape the relationship between money, economic power and geopolitical clout.
An official Chinese digital yuan, more than five years in the making, is now in pilot runs to slowly start replacing the physical legal tender. If the experiment succeeds, this new cash, valued
the same as the familiar banknotes bearing Mao Zedong’s image, will become the world’s first sovereign token to reside exclusively in the ether.
The trials are taking place just as the blame game around the coronavirus deepens mistrust between the US and China. With President Donald Trump warning that Washington would respond if Beijing intervenes against protests and democratic movements in Hong Kong, chances of a detente from last year’s trade war are fading. Outside the People’s Republic, the big question is if the digital yuan is a challenger to the dollar. Within China, though, there’s a more mundane explanation for why Beijing wants to turn banknotes in circulation into virtual tokens.
Chinese consumers have bypassed both computers and credit cards to embrace mobile payment apps, which have gone on to spawn large money-market funds investing in high-yielding wealth-management products. This has led to the accumulation of risks in opaque shadow banking. Bringing them out in the open requires a leg up for traditional lenders in payments, an area where financial technology has left them far behind. The digital yuan, which will be pushed out to consumers via banks, seeks to restore this missing
balance; it will allow authorities to “regulate an overstretched debt market
more effectively,” says DBS Group Holdings economist Nathan Chow.
Still, there’s also a power play. It isn’t a coincidence that China’s project picked up speed last year as Facebook Inc announced Libra.
Beijing was going to launch the digital money even before the pandemic. However, adoption could be faster now because of people’s fear of catching an infection from handling cash. Also, it’s possible to trace in real time whether an anti-virus subsidy, given out in tokenised form, is reaching the target.
—Bloomberg