- • The People’s Bank of China is working on the digital yuan, a central bank digital currency that aims to replace some of the country’s cash.
- • A number of Chinese cities, including Shenzhen, Chengdu, and Suzhou, have already begun real-world trials for the digital currency.
- • The digital yuan could increase competition in China’s mobile payments industry, which is currently dominated by Alipay from Ant Group and WeChat Pay from Tencent.
GUANGZHOU, CHINA (Reuters) – China is arguably the global leader in the creation of a national digital currency, which it started working on in 2014.
The People’s Bank of China (PBOC) is leading development of the digital yuan, a so-called central bank digital currency (CBDC) that aims to replace some of the country’s cash.
In the world’s second-largest economy, real-world experiments are already underway. Here’s what we know about the digital yuan, also known as the Digital Currency Electronic Payment System (DCEP).
What exactly is the digital yuan?
It’s effectively a way for the central bank to digitalize bank notes and coins in circulation. The Chinese market is already very advanced in cashless payments. The digital yuan would be a way to speed that process up.
It will be legal tender in China and no interest will be paid on it.
“The use of cash is decreasing. Eventually cash will be replaced by something in digital format. That is one of the big drivers behind this,” Yan Xiao, project lead for digital trade at the World Economic Forum, told CNBC.
What is the purpose of its introduction?
Last year, Fan Yifei, the PBOC’s deputy governor, said that there is a “pressing need to digitalize cash and coin” because producing and storing them is currently costly. Cash and coins, according to Fan, are difficult to use, easy to counterfeit, and could be used for illegal purposes due to their anonymity, according to an article in the state-backed publication Yicai Global.
The PBOC sees the digital yuan as having a host of other advantages.
Fan explained how a CBDC could boost payment efficiency and monetary policy transmission in a separate post. A digital yuan, according to Fan, could help with financial stability by providing a system of “controllable anonymity.” Payments would be anonymous to some extent in this case, but data collection tools may aid the central bank in detecting illegal activity.
The PBOC’s actions may also be motivated by a desire to increase competition in the payments space and reduce systemic risk. Alipay, which is run by Alibaba affiliate Ant Group, and WeChat Pay, which is run by internet giant Tencent, dominate China’s digital payments market.
“The existing system is owned by private companies. Should Alipay or WeChat pay goes bankrupt, which is extremely unlikely, it creates systematic risk,” Linghao Bao, analyst at Trivium China, told CNBC. “The biggest reason for them (the PBOC) to do this is to level the playing field. Another reason is maybe create a new platform payments system that will increase efficiency.”
What is the structure of the digital yuan?
This has two aspects: distribution and, ultimately, how it will be invested.
A so-called two-tier distribution structure would be used. The PBOC will allocate the digital yuan to commercial banks in this manner. Commercial banks would be in charge of bringing the money into the hands of the general public. Consumers will be able to exchange their coins and cash for digital yuan through these services.
In real-world trials in cities such as Shenzhen, Chengdu, and Suzhou, China has already given away millions of dollar worth of the digital currency. These include the local government holding a lottery to distribute a certain number of yuan. To obtain the currency, users must normally download a separate app. JD.com, one of China’s largest e-commerce companies, took part in the test and allowed customers to buy goods using the digital yuan.
Is the digital yuan a cryptocurrency similar to Bitcoin?
No, it’s not true. Bitcoin is a cryptocurrency that is said to be decentralised. That is, unlike the digital yuan that will be issued by the PBOC, it is not governed by any central authority such as a central bank.
Bitcoin is also based on the blockchain technology. At this time, it’s unclear what kind of technological foundation the digital yuan will have.
Bitcoin proponents also tout the digital currency’s anonymity.
The digital yuan, according to Fan of the PBOC, would have “controllable anonymity.” As the “sole third party,” anyone running digital yuan wallets will be required to report transactions to the PBOC. Users will have a “loose coupling of accounts,” which means that their current bank account and their digital yuan account aren’t necessarily related.
According to WEF’s Xiao, it may be dependent on a phone number.
China has been pressing for the internationalisation of the yuan, and some observers see the digital yuan as a means to that end.
However, according to Trivium China’s Bao, the digital currency currently has a domestic orientation and foreign use is “not the immediate priority.”