The People’s Republic of China is one step away from introducing the digital yuan as a tool to boost and control its economy. Beijing is actively testing the e-CNY: an electronic version of its national currency. While Western countries are scratching their heads trying to expose China’s underlying goals for the digital yuan, the PRC has been actively sharing its progress on the implementation of the new system. The 2022 Olympic Games in Beijing are envisaged as a milestone event for the wide scale launch of the currency.
Murat Gibadyukov, 7 January 2022
Eleven cities and provinces in China have been testing a new digital currency since the end of 2019 as part of a series of pilot programs to introduce a digital yuan. To date, according to the People’s Bank of China (PBOC), about 21 million people have opened a virtual wallet to use the digital yuan, or e-CNY. The volume of transactions has reached 34.5 billion yuan ($ 5.3 billion).
In July 2021, PBOC finally released a white paper on the progress of implementing the country’s digital fiat currency. The Central Bank attributes the development of e-CNY to the fact that digitalization has led to a rapid decrease in cash payments. To address this, the currency issuance will be included in the M0 aggregator (banknotes and coins in circulation) and will circulate together with the classical yuan.
Globally more cryptocurrencies and global stablecoins, which are pegged to assets such as the U.S. dollar or the price of gold, are entering the market. Since these digital currencies hold systemic risks, China has decided to take matters into its own hands and develop a Chinese retail payment infrastructure adapted to the digital age.
The PRC confirmed its plans to fully launch its digital currency next year. During the 2022 Winter Olympic Games in Beijing, visitors will have a wide range of options for using the digital yuan- not only at venues, but also for various services, including transportation, food, accommodation, shopping, sightseeing and entertainment, as well as healthcare and telecommunications. The Olympics are envisaged as a milestone event for the launch of the e-CNY currency. Visitors and athletes will be able to use this digital payment form without having to open a bank account.
In fact, this is one of the main differences (and advantages) between the digital yuan and other cryptocurrencies – payments in e-CNY can be made directly through the Central Bank, thus skipping the use of commercial banks altogether. Unlike Bitcoin, which is not backed by any government or central bank, the digital yuan is issued and controlled by the People’s Bank of China. The issuance of one cyber yuan leads to the withdrawal of one cash yuan from circulation. But this eliminates the need for financial intermediaries between the seller of goods or services and the consumer. Digital money will go directly from one e-wallet to another, bypassing transit routes through commercial bank accounts, while the money transfer can take place even when offline, without access to the Internet. Among others, the digital yuan will allow China to monitor the transactions inside the economy, bypass the globally recognized SWIFT system, as well as track its own citizens. While being innovative in creating a new payment mechanism, the e-CNY lacks one of the main advantages of cryptocurrencies such as Bitcoin or Ethereum, e-CNY – anonymity.
China’s new plans have already sparked legitimate concerns from Western countries, especially the United States. U.S. President Joe Biden’s administration has stepped up efforts to understand the likely implications of the digital yuan in China, and whether it would be possible to circumvent U.S. sanctions with it. US officials fear that e-CNY could accelerate China’s “long-running effort to dethrone the dollar as the world’s dominant reserve currency”.
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Based on recent articles from Bloomberg and The Wall Street Journal, the digital yuan will give the Chinese government new tools to control not only its economy, but also the population. In their view, the PRC’s goal in creating a digital currency is not to make payments more convenient, but to create a tool that will allow the authorities to monitor residents more closely.
According to the Wall Street Journal, “China is turning legal tender itself into computer code… By design, the digital yuan will negate one of Bitcoin’s major draws: anonymity for the user… Beijing is also positioning the digital yuan for international use and designing it to be untethered to the global financial system, where the U.S. dollar has been king since World War II”.
The outbreak of the COVID-19 pandemic has also had a significant impact on the development of cryptocurrencies. National governments have been accelerating the adoption of blockchain technology in different spheres of life to protect their citizens from overexposing themselves to the virus. In October 2021, El Salvador even adopted Bitcoin as legal tender. Amid the pandemic, when banknotes were seen as potential carriers for the Corona virus, the PRC has sped up its efforts to popularize contactless digital payments en masse, while many Western countries, including Germany, France, and the United States, are still negotiating the possibility of launching their own Central Bank Digital Currencies (CBDC).
Through the introduction of the digital yuan, China intends to make steady progress in strengthening the domestic economy, while also keeping an eye on its citizens. While the PRC is actively following the discussions on the implementation of cross-border CBDC settlements in the G20 countries, it also highly emphasized the use of e-CNY in the domestic economy. In light of the recent prohibitive measures in the circulation and mining of Bitcoin in China, there are clear signs that China’s Communist Party prioritizes the development of the digital yuan and stands ready for dialogue on the regulation of the cryptocurrency.