China creates a digital currency, PayPal should be worried

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China just created its own digital currency: the digital yuan (digi-yuan). It's the first major world economy to launch an e-currency. China isn't just putting cash into a virtual bank account — it's minting cash digitally, turning legal tender into lines of code. For each digi-yuan it issues, it essentially cancels a paper yuan. Unlike a cryptocurrency, digi-yuan is a state-backed currency controlled by China's central bank (like how the US $ is backed by the US gov't and controlled by the Fed). Also, unlike crypto and cash, there's no anonymity with digi-yuan. The Chinese government knows where your yuan has been.

Digi-yuan gives China not more money control but also more control over everything. For example, it is testing digi-yuan expiration dates that could encourage people to spend within a certain time frame (to support economic stimulus). China uses hundreds of millions of facial recognition cameras to surveil and fine citizens for things like jaywalking. With digi-yuan, it could automatically draw the fine money from people's accounts.

Who's worried?

The US of course. Digi-yuan threatens the global power of the USD, and could soften the effect of US sanctions (especially on China). That's why the US is considering a digital currency of its own — so are 60+ other countries.

Many payment companies are also worried. Digi-yuan transactions settle instantly. That could threaten the fee-reliant business models of payment companies like PayPal, which can profit off transfer times. In China, digi-yuan could crush AliPay and WeChat, which are used by billions to make payments.

Bottom line, The USD is used in 88% of foreign exchange trades — the yuan is used in only 4%. That global currency power makes US sanctions a nightmare for countries and individuals who get frozen out. Now that China is positioning the digi-yuan for international use, that could present an attractive alternative to the USD for sanctioned countries.... And for billions of low-income workers who don't want to pay fees when they transfer money to family abroad.

Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.

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