The internet hysteria machine is abuzz with speculation that the People’s Republic of China could dominate the global economy with a digital currency.
The People’s Bank of China (PBOC) is scaring online chicken littles with its Digital Currency Electronic Payment (DCEP) project. Apparently, the DCEP is a plan to test a government cryptocurrency in China.
Similarly to Facebook’s (NASDAQ: FB) Project Libra scheme, the DCEP is generating high levels of hysteria. For instance, Forbes’ contributor Tatiana Koffman muses on How China Will Take Over The World.
Koffman theorizes that the PBOC will use the DCEP as an economic weapon to make the Renminbi; or the Yuan, the world’s dominant currency. To explain, the hope is that people all over the globe will use the DCEP to pay for everything online or in social media.
China’s Currency Problem
Hence, the DCEP could solve the biggest economic problem the People’s Republic of China faces.
To clarify, the world’s currency markets do not accept the Yuan, in the way they treat the U.S. Dollar or the Euro. For example, taxi drivers in Caracas will accept a $20 bill but not a Yuan note.
Moreover, the Renminbi does not appear on Investopedia’s list of the 20 “most tradeable” currencies. Tellingly, Investopedia considers such lesser currencies as the Canadian Dollar, the Swiss Franc, the Australian/New Zealand Dollar, and the the South African Rand as more “tradeable” than the Yuan.
Hence, China is a minor player in the global currency markets. Consequently, the Chinese have little leverage in some situations and many markets.
The Currency Wars
If the Chinese want to finance a project in South America, they could need to use the U.S. Dollar to pay for supplies, for example.
In addition, the Chinese could have to pay for resources such as American wheat or Saudi oil with U.S. dollars or Euros. Hence, the Chinese lose money when they buy resources, or trade.
However, if the Chinese could pay for items in their own currency, they could make more money. Historically, one reason the Soviets lost the Cold War was that they had to pay for everything they bought in hard currency or gold. For instance, the Soviets had to sell oil or minerals to get cash to buy American or Argentine wheat.
Currently, the Chinese need to trade manufactured goods; or cheap labor, for resources such as American food. That puts the People’s Republic in a serious disadvantage.
Thus, the PBOC could increase China’s economic power by creating a currency people outside the People’s Republic will accept. One reason why the United States is so powerful, is that you can use a $20 bill to buy drugs on almost any street corner in the world.
The PBOC is trying to overcome that problem by creating a cryptocurrency anybody with a smartphone could spend. For instance, you could walk into any store in the world and buy a Coke with DCEP through Apple Pay or Google Pay.
Should we be Afraid of China’s DCEP?
I’m not afraid of the DCEP even though the theory behind the fear of it is sound. The reason I’m not afraid of DCEP is that I’m sure it is technologically possible.
Most of today’s cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) are not scalable, for example. To explain, those cryptocurrencies are too big to move through most digital platforms. The problem with the cryptocurrencies is that all the encryption and security measures they build into them makes them big and hard to move.
For example, Ethereum’s co-creator Vitalik Buterin admits his creation moves at a speed of 15 transactions per second (TPS). That means a digital platform could crash if over 15 people try to pay it with Ethereum.
However, there are scalable cryptocurrencies out there. The EOS Network Monitor claims EOS (EOS) can process up to 3.996. However, the Monitor estimated EOS was only processing 22 TPS on 18 December 2019. Meanwhile, Ripple (XRP) claimed to process 28.3 to 31.23 TPS on 18 December 2019. In addition, Ripple claims to have processed up to 1,500 TPS.
Why China’s Digital Currency will not Work
To work the DCEP will need to process several billion TPS. I’m not sure that is technologically possible.
Thus the PBOC will need to solve the blockchain scalability problem to make DCEP work. I think it will take several years, vast amounts of research, and billions of dollars to solve the problem. Obviously, the PBOC has access to those resources.
I predict we will not see a working DCEP for several years. Instead, we will get a series of tests of DCEP in China and beyond.
My guess is the PBOC will need several years of testing to create a working DCEP. That testing will be expensive, cumbersome, complex, and time consuming.
Hence, the DCEP is an experiment we need to watch rather than a danger. The DCEP has the potential to change the world but it will take time.
Originally published at https://marketmadhouse.com on December 22, 2019.