This week saw a torrent of developments in the crypto world and the news that caught our eye was the announcement that China is planning to forge ahead with its central bank digital currency (CBDC) known as the digital yuan.
Now, digital currencies are coming. There has been strong support for them from institutions such as the European Central Bank, Federal Reserve and the People's Bank of China (POBC). However, it's China that seems to be ahead of the game.
Earlier this week, PBOC digital currency research institute head Mu Changchun didn't hesitate to tout the privacy protection qualities of the digital yuan, arguing that the currency would have “reasonable anonymity“.
This begs the question if China is using the digital yuan as another level of control over the population. Now, anyone who is not a fan of the single-party ruling system in China would not bat an eye and argue that that is precisely what is happening here.
Yet, a closer look is necessary, as digital currencies are by design centralized and therefore not completely anonymous. China, on the other hand, is offering a way out of this riddle. It's stating outright that citizens' privacy will be protected and that their information won't be exchanged to third parties.
At the same time, the PBOC will be able to follow through with money flows and track discrepancies, clamping down on money laundering and tax fraud. This doesn't sound interventionist – it sounds like the type of thing that many law enforcement agencies are trying to do around the world.
In fact, even the private sector seems inclined to think that any digital currencies for mass use should be issued by governments alone. This reflects the sentiment expressed by Microsoft president Brad Smith earlier this week.
Surprisingly, not all governments are overly-keen on launching a digital currency right away. Sweden's central bank, Riksbank said in February that it would not want to rely too heavily on digital currencies lest it hurt the physical supply of money.
While China has been a trailblazer, the US Federal Reserve has been more tentative, seeking various consultations on the possibility of a digital dollar. It's funny that the US Federal Reserve should launch a US dollar, as there already is a project that is more or less that.
For instance, Tether or USDT is pegged to the value of the US dollar, meaning that it's one of the most reliable currencies out there. It's more private than the digital yuan in the sense that governments cannot use it to track down their citizens ‘expenditures so easily.
And, to make things better, Tether has actually crossed the $40bn market cap this week, making it fourth-largest cryptocurrency and definitely looking to attract those consumers who fear government oversight and want a bit more freedom.
How anonymous CBDCs would be though remains an open question. The most likely answer though is that governments would seek to introduce a fully-transparent mechanism. Some may argue this is the government concentrating too much power. Others would welcome it as a stop to dirty money.