The digital yuan is a central bank digital currency developed by the People's Bank of China to digitize cash and coin and encourage cashless payment.
Real-world trials are going on in many parts of China, such as Beijing and Shanghai. The digital yuan has been developed to reduce the existing dependency on cash transactions in China. China will become the first major country to issue a central bank digital currency.
Many countries like the UK, Russia, and Japan have plans to launch their own central bank digital currency soon. The United States is much slower than other countries in bringing a central bank digital currency.
The Digital Yuan is China's Central Bank Digital Currency
China was the first to invent paper currency and is now ready to launch its own digital currency. The Digital Currency Electronic Payment (DCEP) or the digital yuan will speed up the process of digitizing cash and coin in China.
China's central bank has developed its own centralized electronic money and plans to keep it under its control. One feature of the digital yuan is the anonymity it provides to the user. It is one of the chief characteristics of cryptocurrency too.
However, the Chinese government has plans to maintain centralized control over its digital yuan using data analysis tools. It will help the government to monitor its people and the economy, despite the anonymity.
The digital yuan was planned in 2014 under a special research team to introduce it in the current payment system and replace domination by private companies. The Winter Olympics to be held in Beijing in 2022 is expected to provide international exposure to the digital yuan.
Developing Cashless Transactions in China
The digital yuan is in its trial form in many parts of China. Fan Yiefei, the deputy governor of the PBOC, claims that there is an urgent need to digitize banknotes and coins circulating in the economy. It will be easier to regulate tax evasion and make it feasible for the government to keep track of financial transactions.
Cashless payment is already in practice through debit cards and credit cards. Payment apps such as Apple Pay and WeChat are bringing in the electronic transfer of money. The digital payment system has reduced the dependency on cash usage. Cashless trade will eventually become very common, and the digital yuan is just a pioneer to introduce the central bank digital currency in the economy.
The digital yuan will provide anonymity to its user. But the government of China has various data analysis tools with which it can trace the ownership of the digital currency and keep track of illegal usage.
Cryptocurrency Usage
Cryptocurrencies are already in use for making payments, though they are not generally accepted as a legal tender like paper currency.
The bitcoin is the world's largest currency which is gaining importance in the financial system. Just ahead of the direct listing by Coinbase on the stock market on Wednesday, Bitcoin hit a new high above $63,00 on Tuesday. It is a major milestone in the crypto market say, experts. Cryptocurrencies are extremely volatile and surge or drop in value in a single day, which affects investors.
However, cryptocurrencies do not resemble the digital yuan as it does not have any central authority to regulate it. Lack of transparency and anonymity of the user are some drawbacks facing the crypto industry.
Some of the leading cryptocurrencies like Bitcoin, Ethereum, XRP, Stellar, Tether, Cardano, and Litecoin are gaining mainstream traction. They are used in cross-border cryptocurrency payments. There are reports of thefts and scams in the crypto space, and cryptocurrencies are not legally recognized in the real world.
Digital currencies provide anonymity to the user, which does not reveal the user's name or address. The anonymity of the user makes it easier for using cryptocurrencies in illegal activities. The government keeps a close watch on crypto transfers to prevent malpractices happening within their countries. A major drawback in cryptocurrencies is the lack of proper regulations to monitor them.
Distribution of Digital Yuan in China
China intends to distribute the digital yuan through a two-tier system. Commercial banks will receive the digital currency from the PBOC and then distribute it to consumers. Consumers can exchange their cash and receive the digital yuan in equal measure. Though there are initial hiccups, they will be addressed say, officials.
The existing monetary system in China is monitored by private companies like WeChat Pay and Alibaba, run by Tencent and Ant Group, respectively. The PBOC is taking steps to reduce systemic risks associated with private companies by introducing the digital yuan. The government is going ahead with plans to step up its payment system, say experts. It will be a new platform wherein other players can compete with the existing companies WeChat and Alipay.
The need for digital cash is on the increase. Making payments will be easier. The US dollar dominates over other currencies, and US officials fear that the digital yuan is a bid to topple the dollar's importance in the world.