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Wednesday, April 21, 2021

A Glimpse at China’s Digital Yuan

New developments came to light when China’s long-awaited digital yuan hit the wallets of some ordinary citizens back in the October of 2020. 

Beijing began exploring the, at the time untapped, territory of digital currencies way back in 2014. However, the project was only able to go into full gear in the year 2017, the same year Chinese authorities cracked down on cryptocurrency trading, ordering the immediate closure of cryptocurrency exchange. 

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Even though the digital yuan has similar workings, it may still not be considered to be a cryptocurrency entirely. This is because, much like the regular yuan, the digital version is also under the control of the People’s Bank Of China and is to be rolled out with the help of the country’s largest commercial banks and financial providers. 

How It Works  

After carrying out small-scale trials at the beginning of 2020, China carried out its biggest pilot test in October 2020 which involved issuing 200 yuan worth of digital money to 50,000 people in the tech hub of Shenzhen by means of a lottery. 

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In order to retrieve the digital money, the participants were required to download the pilot version of the digital yuan wallet which would link them with the major banking chains in the country. A few more tests followed, all of which proved to be successful further paving the way for the new virtual currency to hit mainstream media. 

In terms of the user interface, the digital yuan’s execution is much like already existing commercial digital payment methods within the country, such as Alipay or WeChat Pay. The users download wallets to store their virtual funds. These then generate a QR code which can be scanned easily by payment terminals. 

Now, despite the similarities with widely used apps, the system for digital yuan may be a tad bit more complicated. This virtual currency is designed to replace the cash in circulation, such as coins and banknotes, not money and funds deposited long-term in banks. 

Commercial banks will, no doubt, have a key role in distribution of the digital yuan to users, and in order to do so, they will have to deposit the same amount of their reserves, with the People’s Bank of China, as the digital yuan that they are distributing. 

Commercial and central banks alike will be keeping databases, tracking the flow of different digital yuans from one user to another, something that is quite difficult to achieve in case of coins or banknotes. 

The Impact Of Digital Yuans. 

China’s digital yuan is perhaps the most advanced of the many CBDC initiatives that have been or are being developed around the world. The widespread use of this virtual currency would allow Chinese policymakers greater visibility into how the money flows around the economy.  

An upside to this is that it would help them track any illicit or fraudulent flows of funds, such as money laundering or even terrorist financing. Also, it would allow policymakers to even experiment by targeting the monetary policy interventions on specific economic classes or regions. 

In extreme economic circumstances, adoption of the digital yuan could also allow them to have negative interest rates for cash. 

Even though this digital currency is not yet at the level of Bitcoin, with China’s determination and the constant growth in digital currency users, it may not be long before the digital Yuan is seen to be giving other virtual currencies a hard time. 

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