In addition to the Bahamian Sand Dollar, the digital yuan is the second major central bank digital currency. It is currently being tested online and with offline users to see whether it is usable and how it affects transactions domestically and internationally and between devices. 5.3B transactions have been recorded in the digital yuan trials as of August 2021. Chinese authorities say e-CNY will be used in Beijing and other Olympic venues during the 2022 Winter Olympics.
The impact of the Digital Yuan on the loss of reserve currency status is still too early to assess, but some economists believe this would be a groundbreaking development. Current conditions are as follows:
How does the digital yuan work?
Yuan cryptocurrency and Digital Currency Electronic Payment (DCEP) are other names for the digital yuan, also called E-CNY, E-Yuan, digital RMB, and Yuan cryptocurrency. The Chinese renminbi is not to be replaced by e-CNY, which can be used alongside other payment methods and deposit accounts. The benefit of digital yuan is that it cannot be stolen, and it requires no additional change to be carried in your pocket like regular cash.
China also leads currency digitization since it is one of the world’s most digitalized payment markets. In 2019, China had 100 billion mobile payment transactions worth 350 trillion yuan ($54 trillion) in total. According to these statistics, China is an ideal candidate to be digitalized.
Read our article on central bank digital currencies (CBDC) to better understand digital government currencies.
What are the benefits of digital yuan?
Mu Changchun, director of the Digital Currency Research Institute of China’s central bank, said that adopting digital currencies would protect China’s currency sovereignty and legal currency status and provide controlled anonymity. Specifically, Mu Changchun said:
- Keeping money-laundering and terrorism financing at bay by allowing partially anonymous payments
- Transacting in developing countries or countries sanctioned by the US
- Developing a system of international financial transactions in which the Chinese currency competes with the USD
Digital yuan, in addition:
- The central bank will work directly with customers, removing banks from the cash ecosystem. Fewer middlemen may improve the efficiency of transactions.
- Cash distribution can be made more flexible. The central bank can increase cash distribution during economic crises.
- Instead of using inefficient checks, distribute money right away.
- Set expiration dates for money
- Specifically target the economy by allowing certain goods and services to be spent only on them
How much adoption does digital yuan have?
By integrating the central bank’s digital payment method into their services, Chinese firms can gain a intermediaries competitive advantage. Among JD.com’s uses of e-CNY are:
- On their website, they accept B2C payments
- Paying partner firms on a B2B basis
- Settlements across banks
- Dividends distributed to employees
Among the others are:
- An online video sharing and streaming platform, Bilibili
- In a similar way to Uber, DiDi Chuxing offers transportation services through an app.
- Like Amazon, Meituan Dianping is one of the largest wholesale and distribution platforms in China
Comparison of Alipay and WeChat pay with the digital yuan
Paying online with Alipay and TenPay, previously known as WeChat pay, is possible with these platforms. Similar to PayPal, Alipay is another online payment option. The service is owned by Alibaba and was initially used to make payments on their website before expanding to other services. Meanwhile, WeChat pay provides a digital wallet that is available via WeChat. According to a Chinese study conducted by the International Research Group, this proportion represents 93 percent of the online payment providers market.
There are three dangers
The development of digital currencies has been on the minds of many central banks. Japan and South Korea aren’t far behind China in this regard. Four or five years from now, the EU says they could have a digital euro.
Dangers lie ahead for those who lag. International payments are the first danger. Currently, international currency transactions are carried out by using the SWIFT international banking protocol via the US dollar as an intermediary. Therefore, the US dollar is in high demand, which is beneficial for the US government to borrow more cheaply. Among the exports to China alone in 2019, US$134 billion (£96 billion) was worth the sum.
Unlike SWIFT or the dollar, digital yuan transactions do not require SWIFT or the dollar, which could have implications for using the dollar globally. Over 120 countries are China’s largest trading partners, and many questions settling in dollars because it increases the financial risk of adverse exchange rate movements. According to China, its objective is to allow the market to fix international transactions rather than replace the dollar with the digital yuan.
In addition, if central banks do not build digital money in response to market demand, market forces will. The Chinese invented paper money in the 11th century, during the Song Dynasty. However, it rapidly loses its relevance today. Credit cards with contactless technology have become ubiquitous during the pandemic. It is even better to use digital money, since it is more affordable.
Three, if a country fails to embrace digital currencies, its central bank will lose control over monetary policy to cryptocurrencies – regardless of whether they are decentralised or centralised like Facebook’s forthcoming currency. Essentially, if these non-sovereign coins become widely used for payments, central banks will have a harder time setting interest rates and changing money supply in order to manage their economies. Obviously, it is possible to ban cryptocurrencies, however, this would be counterproductive to progress and all the advantages cryptocurrencies offer.
A heightened tension between China, the United States, and Europe is causing the Digital Yuan to appear. The first-mover advantage given to China with this new currency is clearly concerning.
In addition, it should be much easier to bypass sanctions such as the ones imposed recently on Chinese officials for human rights violations when the digital yuan is functional. The use of the currency could lead to calls to sanction those who use it, which raises numerous questions about the currency’s viability and consequences, which can be discussed later.
The Chinese authorities announced a ban on ICOs and a crackdown on exchanges. The Chinese authorities told a ban on ICOs, a crackdown on exchanges. A ban on ICOs, and the Chinese authorities said a crackdown on businesses. However to centralized 2017. Due to its non-legal status and the fear of provoking financial instability and triggering a capital flight. Chinese YuanPay Group is the predominant currency used to make Bitcoin transactions, and before the ban in 2016, 93% percent of all Bitcoin transactions happen in Chinese yuan.