China Pushes The Battle For Cryptocurrency Hegemony To A New Stage

At a meeting of the Chinese People's Political Consultative Conference in Beijing in May, members proposed a plan to create an East Asian digital currency based on an Asian currency basket. © Kyodo

The global competition for supreme power over cryptocurrencies has entered a new phase with China creating an East Asia cryptocurrency program and social media company. US Facebook adjusts the Libra money scheme to suit the positions of US regulators.

At a meeting of the Chinese People's Political Consultative Conference (CPPCC) at the People's Great Hall in Beijing from May 21, 10 members proposed a plan to create a digital currency including Chinese Yuan, Japanese Yen, Korean Won and Hong Kong Dollars.

The proposal drew attention when the 10 members included influential figures like Neil Shen, co-founder of leading travel service provider China Ctrip. Shen is a billionaire with an estimated fortune of 1.6 billion USD, he is also a leading venture capitalist in China.

Members also include Henry Tang, a Hong Kong politician and former civil servant, who holds the second highest position of the special administrative region.

The CPPCC, consisting of representatives from various fields, is held on the sidelines of the National People's Congress, the national legislature, to discuss key issues. The proposal at the CPPCC shows that serious discussions about the regional digital currency program are being vigorously conducted in China.

As the People's Bank of China has begun testing digital currencies in Shenzhen and four other locations, the proposal is in line with a national project to bring sovereign cryptocurrencies into use.

Because the 10 members of the proposal say that it is "suitable" for the private sector to proactively create regional digital currencies, the framework is expected to be approved with government endorsement.

Although the value of the planned regional cryptocurrency will be supported by a basket of four currencies, the endorsement rate will be determined according to the economic size of the economies involved, as suggested. 

Therefore, the Yuan and Yen are respectively accounting for over 60% and 20% of the regional cryptocurrency value, respectively.

The proposal intends to set up a cross-border payment network, in which businesses will conduct transactions with each other via digital wallets. The network will help expand international trade as it will reduce the risk of forex fluctuations and allow smooth trading, supporters said.

The network will be positioned to support a free trade agreement being negotiated by Japan, China and South Korea. Therefore, this is also a new effort to create a trading area that combines digital currencies and trade policies, analysts said.

China may also be trying to maintain its relationship with Japan and South Korea at a time when the United States is strained with China.

This proposal is clearly in line with China's efforts to increase the use of international currencies. With the United States repeatedly banning dollar-based transactions as a punishment for rival nations, China is rushing to build an independent payment network with the dollar, which is indispensable for international business transactions.

China has been speeding up research on the digital currency and viewing Libra cryptocurrency plans announced by Facebook in June last year as rivals. For China, Libra, which focuses on the dollar, does not seem like a digital dollar disguised as a currency basket.

With the latest plans for an East Asian digital currency, China will become a country that uses a basket of currencies to accelerate the wider internationalization of currencies.

Meanwhile, the Libra Association, a group organized by Facebook to manage digital currencies, announced in April a new plan to provide native currencies supported by individual currencies such as dollar and euro, put aside the original plan. 

This change reflects the concern of financial regulators, among many others, that the use of different currencies in a country will undermine the impact of monetary policy.

Ironically for China, the new plan regarding the release of the Libra token is even closer to the digital greenback.

Moreover, the revised Libra plan indicates that if a central bank digital currency such as the digital dollar is available, the Libra network can not only adjust itself to serve as a bar platform, but also a single currency digital currency version.

Although U.S. monetary authorities are considered cautious of cryptocurrencies, their actual stance remains uncertain.

China's digital basket currency plan proves that public-private partnerships are developing in that country to design and promote a cross-border digital currency with the yuan at its core.

In this context, the United States and other countries are expected to work more closely between monetary authorities and technology companies to help develop a digital currency across borders or a partner like cross-border sterling.

In Japan, nine companies, including megabanks and East Japan Railways, have begun research on the use of private digital currencies and electronic payment systems with the participation of agencies currency.

While this move is the first step towards creating a digital yen at the initiative of the private sector, Japan should avoid "Galapagosization" - evolutionary isolation - leading to infrastructure development. Digital payments lack global interoperability.

Japanese cell phones developed special features to serve the domestic market but eventually lost their global competitiveness, often considered a prime example of Galapagosization, or Galapagos syndrome, a word, originating from the Galapagos Islands, where biologist Charles Darwin observed different species on some of the islands that existed after following a different evolutionary path.

As a matter of concern for Japan, the yen has been excluded from the revised Libra plan as a candidate currency for digital currencies, although this is one of five currencies include the original Libra currency basket. 

However, the Singapore dollar is one of the currencies mentioned as a candidate, along with the dollar, the euro and the pound.