China Deepens Fintech Dominance With New Digital Currency – The Diplomat

Flashpoints | Security | East Asia

Chinese firms have begun to dominate the fintech sector, and there’s every reason to believe that the stand up of China’s new digital currency will extend and deepen that dominance. Indeed, the prominence of many Chinese firms in the fintech sector has helped lay the necessary foundation for China’s digital leap. This represents an important step in China’s effort to throw off the U.S. dollar’s dominance, as fintech innovation has the potential to become a node of “weaponized interdependence,” the idea that states can exert power through control of multilateral regulatory regimes.  

The fintech sector has grown rapidly in importance since the 2008 financial crash, capitalizing on a combination of technological advances and increasing distrust of the traditional financial industry. Banking and fintech are necessarily connected because of the role that governments play in issuing and regulating currency. Developments in fintech made possible the establishment of a digital currency, but without easy means to use the currency, it would not be attractive to either sellers or consumers.  

As Sara Hsu notes, the Chinese government has stepped up regulation of fintech firms over the past year. Strong growth in the sector generated concerns about crime and corruption, as well as privacy and data security. Most notably, Chinese regulators undertook a month’s long assault on Ant Group, Jack Ma’s fintech giant, resulting in the transition of the firm into a financial holding company overseen by the state. Despite this, China has facilitated the growth of the sector through a variety of policies, including subsidies, tax incentives, and a manageable intellectual property system. By contrast, the fintech patent process in the United States is more opaque, with firms struggling against patent rulings that characterize fintech innovations as “abstract ideas,” making them difficult to protect. Even the European system is more streamlined and predictable than the American one.

The steps that China has taken to create a digital currency will undoubtedly enhance its fintech innovation environment. The digital currency will result in an increase in the volume of digital financial transactions in China and anywhere else that the currency comes into common use. Chinese firms, operating by Chinese regulations, are primed to expand their already extensive reach. None of this is accidental; the establishment of the digital yuan not only gives the Chinese government greater insight into the spending and saving habits of its population, but it also undercuts the financial power that the United States derives from the global hegemony of the dollar. Indeed, abetted by sophisticated fintech, the digital currency could become very attractive to migrant laborers wanting to transfer funds to their families across borders. 

China is still just chipping away at U.S. financial hegemony; the digital yuan will never be attractive to a wide swath of investors who don’t want the Chinese Communist Party snooping through their affairs. Nevertheless, China has the technological tools to lay a foundation for the success of its digital currency, and the U.S. should be paying attention.