China made worldwide waves with the launch of its central government-backed digital currency- the Digital Yuan. The digital renminbi, or the e-CNY in short form, has been released with plans to expedite financial transactions while reducing costs. Reports reveal a collaboration between two of the largest state-run banks- the China Construction Bank(CCB) and the Bank of Communications(BOCOM). The cooperation seeks to find out new applications for the CBDC variant of yuan- the 8th most widely circulated currency worldwide. There have been over 120 patent applications following its launch by May 2020.
Private Reaction in Digital Yuan Boom
Growing from regular payment options, the cooperation is presently aiming to speed up digital yuan usage in investment fund options and insurance products. The CCB recently announced a tie-up with the Shanghai Tiantian Fund Distribution enabling online mutual fund investments by digital currency users.
The list of notable organizations supporting the digital initiative includes Chinese e-commerce conglomerate JD.com, Alibaba’s, Tmall, Hema. Other participants interested in DCEP collaboration and app development include Didi Chuxing, Meituan Dianping, Bilibili. JD.com was the first platform to accept payments in digital yuan. Its fintech arm JD Digits will be joining soon. The pilot program also includes a private bank- Zhejiang E-Commerce Bank, along with 6 other government banks.
The Purpose behind the e-CNY
The Chinese government recently banned all forms of cryptocurrency transactions. Combined with the release of the digital yuan, it is easy to understand the government’s motive. The decentralized nature of a blockchain makes it hard to trace transactions, especially cryptocurrency. Blockchain implementation in the earlier years reaped dividends in the solidification of the digital yuan. Several factors can be attributed to the development of the DCEP, such as:
- A digital yuan produces the best chance of removing corruption, illegal trades, fraud, and tax evasion.
- Digital yuan eases money transfer. A person can send money from location A to B instantly at marginal costs.
- Seamless integration with popular apps like AliPay and WePay- It is only a matter of time before the entire Chinese population starts implementing the Digital Yuan
- It helps strengthen Chinese currency in the world market.
Laying the Digital Yuan Foundation
The sovereign program of China, dubbed DCEP(Digital Currency Electronic Payment) is the 1st major economic launch of a Central bank Digital Currency worldwide. 80% of central banks across the world are already working on digital currency viability- exploring the potential benefits of a CBDC. 50% of them are building PoC. Another 10% are working on pilot launch projects.
An implementation of this magnitude requires pilot test projects. Regions selected for this pilot project included Xiong’an New Area, Shenzhen, Chengdu, and more. Chosen zones include areas near the proposed 2022 Beijing Winter Olympics site, along with Hong Kong. The pilot city project will also spread to other cities- Shanghai, Changsha, Xi’an are in the future pipeline. An interesting fact, the Chinese government is giving away RMB 20million, or 3 million USD, in 100,000 digital red packets to the residents in Suzhou Municipal Area through a lottery.
The legal foundation was laid on 23 October 2020 with a revised legal draft from the PBOC granting digital yuan the same status as legal tender. The Chinese Communist Party’s long-term economic plan till 2035 emphasizes progressing digital currency R&D.
Comparisons with the Dollar
For a long time, the US Dollar has been at the helm of international transactions. The apex currency has a controlling factor in several aspects, especially cross-border transactions. The world’s largest international payments clearinghouse, SWIFT, has to comply with the US. For years, the top rivals to challenge the US hegemony were Russia, China, and the Euro. With the introduction of the digital yuan, China did gain a dominant advantage. It needs to lay out its private trading channels and separate cross-border payment infrastructure. The Chinese government on the other hand dismisses these ideas as far-fetched. It is imposing a crackdown on cryptocurrency at a time where the entire world is looking forward to embracing it. Nations like Luxembourg, El Salvador, and Ukraine have standardized cryptocurrencies as legal tenders.
The DCEP will revolutionize the digital payment processing system in China. In 2020, 4 out of 5 transactions were carried out through digital payment systems- amounting to 347 trillion RMB(49 trillion USD). The DCEP won’t have a bigger impact on world economics. Rather, it will empower the government to achieve the long-cherished dream of “controlled anonymity” and help prevent frauds, illegal activities, money laundering, and tax evasion.
With reduced or eliminated money transfer charges, the digital yuan can also benefit the Chinese people, along with the companies. Similar sentiments have been reflected by the US Chairman of the Official Monetary and Financial Institutions Forum- Mark Sobel. According to him, the digital yuan is not a threat to the US dollar.