Published: August 9th, 2021
At least 80 of the world’s central banks are experimenting with central bank digital currencies (CBDCs), but China is the major economy closest to unveiling a fully-fledged virtual banknote, usually referred to as the ‘digital yuan.’
Given China’s outsized influence on the global economy, currency markets are eager to understand what Beijing’s state-sponsored electronic money is all about and how it might differ from cryptocurrencies like bitcoin.
While plans haven’t been revealed in full, real-world trials are underway, and the Peoples Bank of China (PBoC) has made numerous announcements about the project. Analysts and pundits familiar with the CBDC space are starting to weigh in with their own predictions.
We’ve considered the available evidence and drawn some conclusions about the likely form of China’s state-issued e-money and its potential value as a tradeable asset. Can it be a crypto competitor? Let’s take a look.
China’s virtual banknote will be a CBDC or central bank digital currency. That means it will be state-run and issued by the Peoples Bank of China. That makes it effectively a ‘digital fiat’, an electronic version of the official state currency, the Chinese Yuan Renminbi (CNH).
The iteration currently being trialled is similar to a stablecoin, pegged at a 1:1 ratio with the renminbi. But any parallels with cryptocurrencies probably end there.
As the digital equivalent of the country’s physical currency, it will be a form of fiat that you keep in a smartphone wallet rather than folded in your purse or back pocket. Every paper banknote minted by the PBoC has a unique identifier, and every digital yuan token will have the same.
Another thing separating it from the cryptocurrency realm is the fact that CBDCs aren’t generally built on a decentralised blockchain. The PBoC (and, realistically, any central bank issuing a digital currency) will demand clear authority over ledgers and the supply in circulation.
While Beijing’s plans were first proposed in 2017, the digital yuan has been in pilot stage since the Spring of last year.
In November 2020, the People's Bank of China started airdropping digital yuan to businesses and consumers to test the technology, de-bug any issues, and generate enthusiasm for it. That process is still ongoing.
July figures from the PBoC indicate the digital yuan has r been used in more than 70 million transactions worth a total of 34.2 billion yuan (USD 5 billion).
The PBoC’s deputy governor, Fan Yifei, told state-sponsored news outlets last year that physical money is easy to counterfeit and expensive to print and maintain. The anonymity or hard cash also means it can be used for criminal purposes. ‘Moving to a digital currency would eliminate those problems, he said.
Many analysts believe that worries about the anonymity of physical cash are the driving force behind the initiative. The Chinese government is building the world's most pervasive state surveillance system. Having granular visibility into every transaction made by every individual and organisation in China would be a data goldmine and, potentially, another mechanism of social and political control.
Forex traders might take note of comments by Matt Pottinger, a former US national security. In a recent column for The Financial Times, he noted that the digital yuan could be ‘turned off like a light switch if any business or individual fell out of favour with the Chinese government. The PBoC would have the power to block transactions, access private digital wallets, and remove any suspect digital yuan from apps.
Despite attempts by Chinese officials to appropriate some of the language of crypto to stoke enthusiasm for the coming launch, the key concept of decentralisation has been notably absent from their vocabulary.
Both bitcoin and the digital yuan currently being piloted can be used for digital peer-to-peer payments, but that’s really the only similarity. Here are some key differences:
Beijing has cracked down on bitcoin use domestically and famously banned its formerly huge BTC mining industry, but the Chinese government may also be looking to tackle bitcoin on another front: in the race to replace the US dollar as the world’s leading reserve currency.
The Chinese Communist Party has denied that’s part of the digital yuan plan. But the PBoC’s July 2021 report says it's going to invest further in cross-border payment trials to promote the use of the digital yuan for international transactions.
That could leave BTC with an even longer journey to make before it can challenge the greenback on the world stage.