So China would have its Bitcoin ready? No, don't even think about it. It is much more than that. Yes, the next digital yuan will be "tokenized" money, but the similarity ends there. The crypto-yuan, which may be on offer as early as 2020, will be fully backed by the central bank of the world's second largest economy. It will draw its value from the Chinese state's ability to impose taxes forever. Other national authorities will rush to replicate this powerful idea.
They are the banks of the future, baby. Little is known of the digital yuan except for five years and Beijing is almost ready to go.
The vulgate says that this token will be a private blockchain, a peer-to-peer network for sharing information and validating transactions, with the People's Bank of China in control of who will be able to participate.
The currency will be provided through the banking system and will replace some of the physical money. It won't be difficult given the ubiquitous presence of Chinese QR code-based digital wallets like Alipay and WeChat Pay.
It may start on the sly, but the digital yuan can affect the future of banks, breaking both the traditional banking system and the floating exchange rate system the world has lived with since 1973.
No wonder that for China, "Blockchain and digital yuan are national strategic priorities, almost at the level of the Internet", as he says Gautam Chhugani, fintech analyst at Sanford C. Bernstein & Co.
Since the seventeenth century the most important thing in the banking sector has been accounting. A sea of guarantee documents to gain confidence in situations where it does not exist.
The Blockchain explained with your feet
When Gianluca di Napoli (one random name) agrees to send money to Jeff of Seattle (another random name), they both use a chain of interconnected intermediaries that replace trust. The distributed ledgers of the Blockchain make trust irrelevant. Gianluca creates a secret code and shares its encrypted version with Jeff, who uses it to create a digital contract to pay Gianluca. The whole cumbersome and expensive network of banks becomes redundant. He imagines that it threatens the traditional banking sector.
China isn't the only one experimenting
About solutions and about old finance that aims to survive, another example of a digital payment solution is Quorum, an app from JPMorgan Chase & Co. (yes THAT JPMorgan Chase). It is a platform based on the Ethereum cryptocurrency, on which the Monetary Authority of Singapore operates Ubin, a central bank pilot digital currency project.
In summary: we are at the beginning. If blockchain technology manages a large number of simultaneous transactions well, digital currencies could replace not only physical money but also bank reserves.
The banks of the future will be unrecognizable
Today, reserves with a central bank are managed by credit institutions. Tomorrow a cryptoyuan (or a Singapore cryptodollar or an Indian cryptorupia) could circumvent this system and allow any currency holder to have a deposit with the central bank.
Agustin Carstens, general manager of the Bank for International Settlement, said “If the central bank becomes everyone's bank, it can also become everyone's lender”.
But why should central banks degrade their banking systems on their own?
One answer, looking at Europe and Japan, is that negative interest rates are doing it anyway.
Lenders are hungry for profit because while the central bank uses rates to hold its deposits, they cannot easily pass those negative interest rates to their depositors. For this reason, if the global economy gets bogged down in the long term, the official digital currencies could act as parachutes without involving the banks.
The other, more concrete reason is that technological progress is making the status quo unsustainable.
It is no coincidence that China accelerated its national cryptocurrency after Facebook announced the Libra project, advertised as an alternative dollar.
But sooner or later someone in Silicon Valley will be successful, and the future of banks will wipe out the fig leaf of monetary sovereignty in emerging markets in the process.
Banks of the future: new form, new powers
The banks of the future will no longer be made of bank and monetary agreements, but of total control. Token transactions will not be like the current ones. They will be nominal: if the central bank wants to see who is spending where, it can. If the money is no longer anonymous, there is no longer anonymity. More difficult life for money launderers and terrorists, but the future bank could also become a tool to punish political dissent.
The banks of the future are taking shape right now. It will be a decade of roller coasters for the banking and monetary sector, for privacy and politics. It will destroy no financial empires and jobs. Others will be born.