China is doubling down on their digital currency. Here’s all you need to know about the digital yuan and how it will impact the world.
China’s revolutionary national digital currency project, the digital yuan, is moving forward at full speed. The country is pressing ahead with trials, with lotteries in June giving out free online wallets containing 200 digital yuan ($31.34) in 200,000 “red packets,” totaling at over $6.2 million.
Chinese residents will be able to partake in the lottery using two banking apps. Previous lotteries have already taken place in Chinese cities such as Cheng Du and Shenzhen.
Unlike most decentralized cryptocurrencies, which work outside the control of the central authority, the digital yuan will be the world’s first cryptocurrency that is state-owned, issued by central bank People’s Bank of China (PBOC). You can use the digital yuan anywhere since it works exactly like cash, except it’s on your phone.
Kickstarting the digital yuan
The digital yuan was started in 2014 by Chinese bureaucrat Zhou Xiaochuan. Zhou saw the digital yuan as a way to fend off potential threats from digital currencies like Bitcoin and other cryptocurrencies. Chinese regulators, who banned cryptocurrency exchanges in 2017, have also said the digital yuan will help combat money laundering and increase financial inclusion. This year, a ban on providing services related to cryptocurrency transactions was also introduced.
In 2019, Fan Yifei, deputy governor of the PBOC, stated that there was a pressing need to digitize cash and coins. Fan furthermore said that cash and coins are not always effective to use, easy to counterfeit, and could be used for illicit purposes. A digital yuan could help with China’s system of corruption and illegal activity, he argued.
The digital yuan is expected to launch in the next two years. At the moment, it is undergoing trials in four cities: Shenzhen, Suzhou, Xiong An, and Cheng Du. Chinese government employees are expected to receive half of their travel allowance in digital yuan. The digital yuan is also expected to be piloted at the Winter Olympics in 2022 with international guests.
The digital yuan is stored in a digital wallet, based on technology called Near Field Communication, or NFC. NFC which allows users to make secure transactions, exchange digital content, and connect electronic devices with a touch.
NFC offers a low-speed connection with a simple setup that can be used to bootstrap more capable wireless connections. NFC allows you to use the digital yuan for offline payment. So, even if you can’t get a signal, you will still be able to pay with the digital yuan.
On the flip side, visitors to China will find it much easier to use the digital currency. This is because travelers can’t use WeChat or Alipay if they don’t have a Chinese bank account or a Chinese registered credit card. This will all change with digital yuan. With digital yuan you do not need a bank account to use the digital currency.
This could also be a boost for financial inclusion in the country. Data from the World Bank reveals that China, the world’s second-largest economy, has the highest percentage of bank-less individuals. With the arrival of China’s digital yuan, it will be even easier to enable China’s unbanked and underbanked population to gain access to mainstream financial services.
Furthermore, many foreign businesses will find it more efficient to deal directly with digital yuan. The globally used SWIFT payment network allows individuals and businesses to accept or send international money via electronic or credit card payments, but it is inefficient, limited and slow. With digital yuan transactions, people can skip the SWIFT system and send money directly through the digital yuan app.
In terms of adoption, franchises such as McDonald’s, Starbucks, and Subway were all named in the PBOC’s list of firms that will test the digital currency in small transactions with 19 local businesses. The global names will be joined by local hotels, convenience stores, a stuffed bun shop, a bakery, a bookstore and a gym.
Some countries have expressed concern with this project on account of data control. The reams of data produced by digital yuan transactions could give China’s central bank valuable real-time insights and increased monitoring prowess.
Furthermore, many Chinese locals have highlighted privacy concerns. Because the currency is issued digitally by the PBOC, the government can check every single transfer that happens on the platform. This can help them eliminate counterfeiting, money laundering, and have a much more clear understanding of who’s spending what. For the same reason, the use of the digital yuan also raises potential privacy issues.
Yet, the project is truly one of its kind, and signals the Chinese government’s efforts to be at the helm of frontier financial technologies. While concerns will continue to be raised as the country goes ahead with the currency’s roll out, what can be said for sure is that the digital yuan has the potential to significantly transform the global financial system.