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What is Digital Yuan and how does it work?

Blockchain has played an integral role in transforming technology and its value for businesses as well as individuals. One of the most dominant examples of the transformative power of blockchain has been evident in cryptocurrencies, such as Bitcoin. At the same time, the prospects for decentralized access to financial services serve a crucial role in establishing a new approach to using banking and financial services. The example of China’s digital Yuan is proof of how governments are also opening up to the use of blockchain in transforming financial services. Central Bank Digital Currencies, or CBDCs, have emerged as prominent examples of innovation in adopting blockchain. 

Many governments all over the world and central banks have been working on coming up with decentralized currency, which offers more options to currency holders. The following discussion paints a detailed introduction to the digital Yuan explained with an overview of its working and impact on the Chinese economy. You can also identify the advantages it would offer to users and organizations. 

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What is the Digital Yuan?

The People’s Bank of China is one of the leaders in the CBDC space, with consistent research and development on CBDCs. It has worked on research for identifying the benefits of CBDCs since 2014. With the early-mover advantage, PBoC successfully launched its CBDC, the digital Yuan or e-CNY, in April 2022. Although the global pandemic in 2020 hampered the development of the project, it maintained a steady pace in overcoming health-related and financial obstacles.

The China digital currency would be the first example of a national government endorsing CBDC applications. As a result, many other countries have identified the need to stay ahead in the race for blockchain dominance. Let us explore more details about the background for the development of the digital Yuan. 

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The Role of China in Blockchain and Crypto Landscape

One of the trusted approaches to understanding digital Yuan cryptocurrency would focus on its background. China has been one of the earliest leaders in the domain of crypto. The Bitcoin network has many Chinese miners, with control over a significant share of the available supply of Bitcoin for mining. On top of it, China has also emerged as one of the biggest hubs for blockchain development, outrunning the US. 

However, regulatory crackdowns on cryptocurrencies in China created many doubts regarding the feasibility of CBDCs like the digital Yuan. As a matter of fact, China perceives blockchain technology as a better alternative to cryptocurrencies. China implemented regulatory sanctions on cryptocurrencies, which started off with investigations into ICOs in 2017. Furthermore, the country’s government also coerced miners and citizens to disclose details of their wealth stored overseas in cryptocurrencies. 

The efforts behind China’s digital Yuan show that the dragon of the East wants to avoid the concerns with cryptocurrencies. On the contrary, it emphasizes more on the technology behind them and ignores the assets such as Bitcoin and Ether. China has established a revised emphasis on permissioned blockchain alongside digital currencies under the control of banks. 

All these initiatives helped China set the tone for developing its own CBDC by sidelining the prominent setbacks with crypto assets. Many investors assume that CBDCs could serve favorable implications for cryptocurrencies. However, central bank digital currencies would only foster the mainstream adoption of digital currencies, thereby opening up more people to crypto assets. 

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The Beginnings of Digital Yuan

The definition of ‘what is digital Yuan’ and the role of China in crypto and blockchain create curiosity regarding the origins of the digital Yuan. The People’s Bank of China started working on the digital Yuan in 2014 under the name of the Digital Currency Electronic Payment or DCEP project. However, the intention of China to develop a new addition to the blockchain ecosystem had always remained under wraps for years. 

The highlights of the digital Yuan project gained prominence with the discussions on the project in 2019 in the public domain. Representatives of the People’s Bank of China expressed their views regarding the project, and it was up for competition against Libra cryptocurrency on Facebook. 

According to the governor of the PBoC, the China digital currency would not serve as a new currency to replace the existing Yuan. On the contrary, it would develop as a digital version of the existing monetary system of China. The governor, Yi Gang, also revealed that the new digital currency would focus on transactions and payments, which would support the growing digital economy of China.

China has registered formidable growth in the e-commerce market, which has expanded by huge margins. Online purchases scaled up by humongous margins during the global pandemic. Apparently, Chinese consumers purchased around $20.8 million worth of goods through retail e-commerce in 2020. 

The PBoC governor also pointed out that the impact of the digital Yuan explained in detail, would emphasize its flexibility for integration into the mainstream economy of China. Yi Gang expressed positive views regarding the use of digital Yuan for speeding up transaction settlements in banks. At the same time, the digital Yuan would not affect regular processes such as deposits, which would rely on the standard Yuan or Renminbi currency. 

The origins of the digital Yuan also draw the limelight on the national blockchain strategy of China. President Xi Jinping announced the need for a strategic approach to fuel the plans for driving blockchain adoption. It is also reasonable to expect favorable rates of adoption of digital Yuan cryptocurrency in almost all aspects of daily life. 

Leading companies such as Alibaba and Tencent have taken the lead in the digitalization of e-commerce and payments. On the other hand, China is also working on the development of a formidable IoT infrastructure and smart cities. All these factors underlying the origins of the digital Yuan prove that it is a significant part of the long-term plan of China for fuelling and digital and cashless society. 

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Working of Digital Yuan

The statements by the governor of the People’s Bank of China showcase the purpose of the digital Yuan with substantial clarity. However, it is also important to answer “how digital Yuan works” alongside determining whether it resembles cryptocurrencies. The applications of blockchain technology in governance and central bank use cases focused on private blockchains in 2019.

Private blockchain networks are also referred to as permissioned blockchains, which are closed networks and only accessible to nodes allowed to participate. As a matter of fact, the private or permissioned blockchain model is a common highlight in the domain of CBDCs. If you look at developments in the field of central bank digital currencies in other regions, such as the EU and Russia, you will find private blockchains as the foundational infrastructure.       

The private blockchain approach is an important highlight in defining ‘what is digital Yuan’ and its role as a CBDC. Central banks would choose the permissioned blockchain approach as they do not want to disclose sensitive financial information or details of transactions in public. China has developed a Blockchain Service Network or BSN as a permissioned blockchain network, where developers and organizations could develop digital assets and decentralized applications.

Theoretically, all the third-party applications on Blockchain Service Network are decentralized in nature. On the other hand, the ‘decentralization’ element is questionable, with the Chinese government controlling the BSN. However, the international version of BSN can deliver the desired benefits of decentralization to users. 

The working of digital Yuan explained the possibilities of adopting a uniform model for the development of CBDCs. Some overseas projects have followed similar approaches to the global blockchain-based infrastructure of China. The Blockchain Service Network integrated Hyperledger Fabric in July 2020, and many other public blockchain networks followed suit. Some of the popular projects on BSN include Tezos, Ethereum, NEO, EOS, and Nervos. Other recent additions to the BSN include Solana, Oasis, Polkadot, and Algorand. In addition, BSN also expects many other public blockchain networks to join it in 2022. 

Apart from the concerns of decentralization, the digital Yuan cryptocurrency comparison also focuses on anonymity. Unlike cryptocurrencies, the BSN would have complete access to the financial information about transactions and the individuals using BSN services. Anonymity offers a distinct advantage to central banks as they don’t have to deal with anonymous clients and related complications. 

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Impact of Digital Yuan

The explanation of digital Yuan basics and its working creates curiosity regarding its impact. Digital Yuan could offer considerable benefits to users in accessing the benefits of a digital economy. However, the China digital Yuan would serve more benefits for the government and central banks. 

For example, the Chinese government could track transactions more efficiently, thereby supporting the development of the socialist-based digital economy. Cash would continue as the popular method of payment. However, a growing number of users would gradually turn towards the digital Yuan for the digitalization of the Chinese economy. Here is an outline of the notable advantages of the digital Yuan for the Chinese state and its citizens.

  • Efficiency in Payment Systems

The foremost impact of how the digital Yuan works in fuelling the digital economy would reflect better payment systems. Digital Yuan has the capability for integration into online payment systems, such as the ones developed by Alibaba and Tencent. Both companies are likely to add the digital Yuan CBDC into the Alipay and WeChat smartphone apps. Such initiatives could help in simplifying payment systems. With a dominant share of online transactions in China, these platforms could help the government maintain track of online payments. 

  • Better Global Recognition for Renminbi

The advantages of the digital Yuan explained also emphasize the opportunities for improving the position of the Renminbi on a global stage. It is important to note that the US dollar has been the preferred choice for monetary transfers and transaction settlements. Around 88.3% of international transactions depend on the US dollar. 

However, the pandemic affected the value of the US dollar in 2020. Subsequently, the decision of the Federal Reserve to print more money also creates valid concerns. These factors could result in monetary instability for the largest economy in the world. In the event of the collapse of the US dollar, the digital Yuan could emerge as a favorable alternative. 

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Bottom Line

The introduction to China’s digital currency and its advantages prove its potential for introducing new milestones in China’s digital economy. As a central bank digital currency project, the digital Yuan aims to speed up financial transactions alongside ensuring efficiency. At the same time, the digital Yuan can also open up the possibilities for more users to access financial services. Most important of all, it can play a pivotal role in the long-term plan of China for a cashless society. 

Interestingly, the digital Yuan also presents multiple advantages for the Chinese government and its central bank. For example, the facility of tracking digital Yuan transactions on BSN can ensure the government’s control over financial transactions. Furthermore, central banks would not have to deal with anonymous clients. Central banks don’t have to think of emergency plans in the event of volatility in crypto markets with the digital Yuan. Learn more about CBDCs and their potential for the future.

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*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!

About Author

Georgia Weston is one of the most prolific thinkers in the blockchain space. In the past years, she came up with many clever ideas that brought scalability, anonymity and more features to the open blockchains. She has a keen interest in topics like Blockchain, NFTs, Defis, etc., and is currently working with 101 Blockchains as a content writer and customer relationship specialist.

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