China’s digital Yuan and its Potential Impact on Cryptocurrency
Today, nearly 90 governments worldwide are exploring implementing central bank digital currencies (CBDCs). China is currently at the forefront of the Digital Yuan. It has the most extensive CBDC pilot in the world, with 13.61 billion RMB worth of Digital Yuan in circulation and a large number of users with 260 million wallets. China's digital currency marks the beginning of an age of digital currency, potentially revolutionizing how people make payments domestically and internationally. This article will examine how the Digital Yuan works and its potential implications on decentralized cryptocurrencies like Bitcoin.
Chain 1: What is the Digital Yuan?
The Digital Yuan, issued and regulated by the People's Bank of China (PBoC), is a central bank digital currency (CBDC) designed to function as a digital equivalent to physical cash. It operates on a centralized ledger system, with the PBoC exercising control over currency issuance and distribution. Transactions conducted with the Digital yuan are recorded on the PBoC's ledger. From a user's perspective, the Digital Yuan bears similarities to existing digital payment methods, as funds are stored in digital wallets, and payments are facilitated through QR code scanning.
The structure of the Digital Yuan is built upon the concept of "one coin, two databases, three centres". "One coin" refers to the Digital Yuan as a unit of currency. The "two databases" refers to the overall tracking system from the Central Bank to monitor outstanding Digital Yuan, which will be on the same cloud system as the Central Bank. "Three centres" refer to the certification centre, which will keep a database that maps real identities against all digital wallet users; the registration centre, which will track Digital Yuan ownership and transactions; and the big data analysis centre, which the central bank will use to monitor payment flows for financial risks and detect illegal behaviours.
Chain 2: The Development of the Digital Yuan
This Cryptocurrency has been developing for over nine years since the People's Bank of China (PBoC) began investigating a government-run bitcoin in 2014. Chinese crypto miners were responsible for 95% of mined bitcoin at the time. Gradually, Chinese officials became more wary of cryptocurrencies' decentralized, anonymous nature, which threatened China's strict social and financial controls. In 2021, the government officially banned the mining and exchange of decentralized cryptocurrencies.
Despite banning decentralized cryptocurrencies, the Chinese government began developing centralized cryptocurrencies as a means of exerting more control over the country's financial sectors. In April 2020, China launched the Blockchain-based Service Network (BSN) to formalize its blockchain and began testing for the Digital Yuan. Pilot programs were implemented in major cities such as Shenzhen, Suzhou, and Chengdu. By October 2021, there were 123 million individual wallets, although the average sum in each wallet was only 3 RMB ($0.47 USD). To promote more significant usage of the digital yuan, China promoted the Digital Yuan at the Winter Olympics in January 2022 and chose 750,000 people to be given 150 million Digital Yuan (US$23 million) to spend among local businesses and online retailers. Subsequently, PBoC reported around $300,000 (2 million RMB) in daily transactions with the digital yuan throughout the Olympics and a doubling in the digital yuan's user base.
Chain 3: Potential Benefits of the Digital Yuan
The Digital Yuan could have positive impacts on China. Unlike decentralized cryptocurrencies that can be difficult to track and counterfeit, the centralized nature of the digital yuan enables the Chinese government to trace financial transactions and prevent crimes like money laundering, terrorist financing and tax evasion efficiently. Moreover, while the Digital Yuan funds are backed by the central bank, users engage directly in peer-to-peer transactions without being processed through commercial banks, reducing the cost of any fees and increasing the speed of transactions.
Furthermore, the Digital Yuan operates through NFC technology, allowing offline transactions. This allows for quick and efficient payment methods that are more accessible to individuals who lack access to traditional banking services. In fact, the Digital Yuan is already being tested amongst elderly populations and in broader rural connectivity schemes initiated to improve digitization.
A successful roll-out of the Digital Yuan could also accelerate the pace of currency digitalization globally. Suppose the the Digital Yuan becomes widely used in China. In that case, other central banks will likely see it as proof of the feasibility of CBDCs and a sign of increased competition, leading them to redouble their efforts in developing their own digital currencies.
Chain 4: Challenges of the Digital Yuan
However, the Digital Yuan also faces many challenges. Its decentralized nature raises concerns about privacy and surveillance. Not only do the Chinese authorities have complete surveillance over digital currency, it even has the power to deactivate a wallet or reverse transactions, giving them undue power over their citizens.
Furthermore, while the central bank has set up a network of Digital Yuan payment gateways at online and offline retailers across China, payment platforms offered by private companies such as WeChat Pay and Alipay dominate about 94.4% of the payment market. For many users, incentives to use the Digital Yuan are lacking since China's existing digital payment options are reliable and work seamlessly with other app-based services, from social media to e-commerce platforms.
Moreover, while the Digital Yuan is advanced compared to the digital currency of other countries, its speed is still far from the speed achieved by AliPay and WeChat Pay. At its peak, AliPay's system cleared 544,000 transactions per second, and Tencent Pay processed an average of one billion daily transactions. While the Digital Yuan system completes transactions at a higher speed than Visa at 1,700 TPS, it is still extremely behind payment methods such as AliPay and WeChat Pay regarding scalability and speed.
Chain 5: Impact of the Digital Yuan on Decentralized Cryptocurrencies
Although centralized cryptocurrencies, like the Digital Yuan, and decentralized cryptocurrencies, such as bitcoin, facilitate digital peer-to-peer payments, they have significant differences. The central bank controls the Digital Yuan, whereas decentralized cryptocurrencies like Bitcoin operate on a blockchain ledger without a central authority. Moreover, Bitcoin offers a degree of anonymity, while the Digital Yuan does not provide complete anonymity.
By developing a centralized Cryptocurrency, the Chinese government reduces the possibility of decentralized cryptocurrencies destabilizing the Chinese financial system. This trend could shift the focus away from decentralized cryptocurrencies and towards centralized digital currencies issued and controlled by governments with more regulation and oversight. If the currency gains sufficient traction and is proven successful, other countries may soon implement digital currencies, ushering in an era of Central Bank Digital Currencies (CBDCs).
However, the Chinese government's introduction of the Digital Yuan is unlikely to diminish the popularity of decentralized cryptocurrencies worldwide. Although decentralized cryptocurrencies can be used for transactions and payments, their primary appeal lies in their potential for investment gains and their ability to facilitate anonymous transactions without regulatory oversight.
In contrast, the Digital Yuan is designed to function as a widely implemented currency, serving as a digital alternative to physical cash, focusing on facilitating everyday transactions and providing a stable medium of exchange. As a centralized digital currency issued and controlled by the Chinese government, the Digital Yuan aims to provide a reliable and regulated form of digital payment that can be adopted on a broader scale, aligning with the government's efforts to modernize its financial system.
Conclusion
The Digital Yuan is a new and evolving development with significant potential. Its implementation can bring about tremendous efficiencies to the Chinese economy. Although the Digital Yuan does raise concerns about privacy and individual freedoms, it can reshape the way economies function and be implemented on a national or even global scale.
