Digital Yuan and Its Effect on the Global Economy

Agencies
·5-min read

China, the second largest economy, is all set to roll out a Central Bank Digital Currency (CBDC). China's ambition for upending the US dollar-driven economy is no secret. And that is precisely why the Digital Currency Electronic Payment (DCEP), commonly known as the Digital Yuan, has gained such massive traction. It is an assumption that this digital currency will ultimately wipe out the paper currency prevalent in China. While definitely a bold step amidst the escalating US-China tensions, the intention to make Yuan a reserve currency is legit.

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Digital Yuan – explained!

The Digital Yuan is formally known as the Digital Currency Electronic Payment (DC/EP). It is merely a virtual version of the current paper currency in China, the Yuan. This currency will be backed and issued by the People’s Bank of China (PBOC). Years of research and development have made it possible for the money to be at the pilot testing stage right now. The Chinese government intends to use banks to convert a portion of the Yuan currencies into the digital version. Then, it will be distributed to the citizens and business corporations for usage.

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Though numerous countries have made an attempt to release a Central Bank Digital Currency (CBDC), it appears China is at the forefront. If all goes well, soon China will be announcing the success and widespread use of the Digital Yuan.

Difference between DC/EP and other cryptocurrencies

There are several points of differences that distinguish the DC/EP from the existing cryptocurrencies. The foremost is the aspect of decentralization. While one of the pillars upon which virtual currencies are built is the aspect of decentralization, the digital Yuan is controlled by the People’s Bank of China. It is the prospect of no central authority that has marked cryptocurrency differently from other monetary forms. The bank is, in turn, under the control of the Chinese Communist Party. Thus, there is complete central authority and scope for manipulation. Here, it must be noted that using the Digital Yuan will actually deprive the people of the privacy that using cash brings.

Another difference is the legal stature of the currency. There are numerous countries that have banned the usage of cryptocurrencies as a legit mode of payment. However, the scenario of using cryptocurrencies in China for commercial purposes is quite unclear. But, the digital Yuan will not be facing the same issues. Since it is an effort of the government, there will be no legal repercussions upon its usage.

Now, the third factor that differentiates Digital Yuan from other cryptocurrencies is anonymity. In case of the virtual currencies, there is a high level of privacy, and anonymity is maintained using advanced algorithms. However, in the case of the digital Yuan, privacy is a luxury of the past. With the aid of this new currency, the Chinese government can track each and every transaction and movement with ease. It might give them more leverage than the current currency offers.

China’s move to dominate the global trade market

Against the backdrop of the increasing China-US tensions, the speedy development of the Digital Yuan fuels the rumors. Though China's desire to establish the DC/EP as an international trading currency is no secret, it has yet to come to fruition.

While initially, the Digital Yuan will be used in China and regulated thoroughly, China plans to make it available across the globe soon. Designing the Cross-Border Interbank Payment System (CIPS) has made it possible for China to circulate and make the Digital Yuan available for people all over the world. The CIPS is another move from China to overthrow the dominance of the SWIFT system for global payment transactions.

China has long since worked towards establishing Yuan as an international reserve currency. Though it acquired the status of a reserve currency in 2016 by the IMF, it still holds only around 2% of the total reserves.

In order to promote the international stature of the Yuan, China is pushing on the adoption of the digital Yuan. There are various ways that it can facilitate the use of the digital Yuan in everyday transactions. For instance, domestically, China can make it mandatory for usage in different sectors like healthcare, etc.

Another appealing factor that could lead to the success of the digital Yuan is the requirement of no banking account. It means that now there is an opportunity for unbanked individuals to gain access to this mode of payment. There are around two billion people in the world that do not have the power or resources to opt for the pricey banking infrastructure. Moreover, the convenience, safety, and low transaction fees can propel its adoption.

However, the matter that concerns the most is the utter disregard of the Chinese government for privacy. Digital Yuan does not follow the decentralization aspect and can thus be firmly tracked and controlled by China. This does not bode well for other nations that are not willing to hand over vast realms of information to China. However, the country hopes to lure businesses and other tradings with lucrative offers.

Other than the aspect of conducting surveillance, another issue is the complete power of the PBOC. In a public announcement, it has been stated that the financial institutions involved with the distribution of digital Yuan will have the absolute power to stop sanctions if they suspect any malicious intent. Moreover, it will also have the authority over the coding of the digital Yuan.

Final words

It is without a doubt that Digital Yuan is China's most recent attempt to eliminate the US's power over the global economy. Whether or not China succeeds is another matter altogether. However, upending the global trade scenario might not be as easy as it seems. It remains a question if the world can trust the Chinese government with information and wealth.

Here, trust is a huge factor that the US dollar has established over the years as the reserve currency. However, the Chinese government can make use of the attractive features of Digital Yuan to lure users globally. Furthermore, the notion of cryptocurrencies as a better alternative to fiat currency is slowly gaining prominence across the globe.