With the undeniable rise in popularity surging around digital currency, many major economies are racing to contribute their own. Timing is crucial to competitiveness for governments while digital currency is being adopted rapidly. Leading the way on this race is China, whose sovereign digital currency is already in its testing phase. While the currency is being finalized, the question remains - how will this affect financial technology internationally and domestically?
With thanks to payment methods such as WeChat Pay and Alipay, China has long been ahead of the rest of the world where cashless payments have been concerned. Today, 4 out of 5 payments in China are cashless. No doubt a digital currency will only further aid the government in making cash obsolete.
The sovereign digital currency will require a digital wallet, like with cryptocurrencies today. Most likely the currency will be useable through WeChat Pay and Alipay, platforms that have dominated the Chinese financial payments market. While it seems perfectly natural to facilitate the currencies through these channels, this will lead to competition between regular payments via these channels versus those in digital currencies.
A second effect concerns online lending locally and internationally. It is unlikely that digital sovereign currency that is loaned will be convertible. While this may pose an inconvenience for small businesses and dealings that favor cash, China is quite well set up to be cashless with even micro payments being normalized digitally. This also provides a neat solution for ensuring that funds are traceable.
Thirdly, a sovereign digital currency will streamline issues concerning cross-border payments. Normally a cumbersome financial activity, a standardized sovereign digital currency will pose all the benefits of digital cryptocurrencies where speed and efficiency of international money transfers are concerned. Cross-border payments are normally fraught with regulatory compliance hurdles. The challenge will be for fintechs to ensure they are compliant in handling and transferring the sovereign digital currency around the world, with sufficient security and safety measures in place.
No doubt a government digital currency will only complement fintech businesses in China that are built to facilitate digital payments. Even after factoring inevitably strict regulation and compliance protocols, as well as adequate security features to handle the currency, a digital currency should only encourage the adoption and growth of fintech firms. While this may be a challenge for international fintech startups, it will only be the beginning as world governments scramble to put out their own digital currencies.