The Chinese government has not been too kind to cryptocurrencies in recent years. First, initial coin offerings (ICOs) were banned in China in September 2017. Then, following the conflict on ICOs, the closure of exchange platforms that traded cryptocurrencies or provided facilitation services was ordered. This made the task of buying bitcoin virtually impossible for investors in China.
However, this was not just a general ban. It was a preparation for things to come.
To understand the Chinese government’s tough attitude towards cryptocurrencies, we need to look at the big picture of China’s financial economy and market.
While central banks around the world are addressing bitcoin’s rise and their inability to control it in the way they make fiat currency, China is working towards becoming the first country to operate its currency itself, also known as the Digital Cash Electronic Payment (DCEP) project.
By prohibiting other entities to issue their own cryptocurrencies through the ICO ban and restricting bitcoin exchange, the People’s Bank of China (PBOC) secures the success of its own upcoming digital yan. Moreover, unlike cryptocurrencies like bitcoin, deals in the digital yuan will not defend any presumption of a pseudonym, and its value will be as stable as the physical currency issued by the government.
China Racing Towards a Cashless Society
China wants to become the first nation to issue digital currency in its quest to internationalize the yuan and reduce its reliance on the global dollar payment system.
According to Reuters, an article published in Finance China, a magazine run by the PBOC, noted that the rights to publish and manage digital currencies would become the “new battlefield” of competition between governments.
As part of the project, the PBOC defines the yuan as physical paper currency and digital currency. The idea is to set up a new payment system network in order to break the monopoly of the dollar.
To this end, digital yuan testing is already underway. Several trials have been conducted in four cities, Suzhou, Shenzhen, Chengdu and Xionggan, and at the venue for the 2022 Winter Olympics in Beijing.
How is the Digital Yuan Tested?
In September 2020, the PBOC had issued 10 million yuan ($ 1.5 million) worth of digital currency and distributed it to 50,000 people in the Shenzhen area by lottery.
The winners were rewarded with digital “red packs” worth around 200 yuan, which they could download and spend in 3,000 different stores. With nearly 2 million people registered for the competitions, the operation was judged to be successful.
At the beginning of November, the PBOC governor reported that four billion transactions, accounting for $ 299 million, had been conducted using the digital yuan.
The DCEP payment network allows select users to convert between cash and digital, check their account balances and make payments and payments. Other experiments include government employees receiving transport subsidies in the form of digital currency, and McDonald’s in Xiong’an receiving payment with a digital yuan.
However, there has been no official announcement as to when the payment network will be available to all Chinese citizens.
Will the Public receive PBOC digital currency?
It’s hard to predict. Gains from the tests have been quite positive from the public, with people registering in lots for the lottery.
However, China is already becoming an increasingly cashless society. Even street food vendors and market stalls in small towns prefer to pay cash apps instead of cash.
Mobile wallets like Alipay and WeChat Pay already have large consumer masses in China, and people are unlikely to switch to a government app overnight. However, it was reported that, unlike these payment processors, there will be no fees associated with the digital yuan.
Digital Yuan Vs. Bitcoin
Although the digital yuan is backed by the PBOC, there are several ways it cannot technically complete with bitcoin. It is mostly non-devolved (and therefore not much different than the paper version of yuan) and will not leverage a portable public blockchain ledger like Blockchain does.
There are two main reasons why the PBOC is not ready to run their digital currencies on blockchain: First, experts have doubts that any network could handle the large volume of daily transactions of China’s 1.4 billion population. Second, the decentralization and transparency inherent in blockchain technology are two concepts that contradict the Chinese government’s aim to “strike a balance” between anonymity and the need to address it financial crimes, according to central bank officials.
The digital yuan could allow the PBOC to more closely manage bank loans and direct funds where it deems appropriate, but a central bank-managed digital yuan will never truly compete with Bitcoin’s value propositions.
The economic impact of the forthcoming DCEP is still unclear, and only the future will tell whether central digital currencies will help or hinder China’s economy. What is clear is that this is a new chapter in the ongoing battle between the central bank-managed fiat currency and bitcoin’s peer-to-peer nickname proposal.
This is a guest post by Judy Smith. The views expressed are entirely of their own opinion and do not necessarily reflect the views of BTC Inc or Bitcoin Magazine.