Over the past years, China has been steadily making progress towards a digital yuan (or e-CNY) and is now poised to become the pioneering major economy to launch an official central bank digital currency (CBDC). China has been exploring a potential digital currency since 2014, although its first actual test was not until 2020 with an initial trial launch in Shenzhen, Suzhou, Chengdu, and Xiong’an. These tests were expanded in 2021 to Hainan province, Shanghai, and a number of other cities.
As of April 2022, further expansions are planned for other major Chinese cities and Hong Kong, as well as a likely release during the 2022 Asian Games. 2022 also saw the e-CNY’s highly anticipated trial launch at the 2022 Winter Olympics — the first of such trials to include foreign visitors.
Users in 23 major cities can now pay for goods and services with the e-CNY. Signing up is possible through seven traditional commercial banks and two online banks — all of which are Chinese. To better understand what e-CNY is and why China created their own digital currency, proceed in reading this article.
What is e-CNY?
The e-CNY, also known as the digital yuan and officially called the Digital Currency Electronic Payment (DC/EP), is a digitized version of China’s legal currency, the renminbi (RMB). It is issued by China’s central bank, the People’s Bank of China (PBOC). It is designed mainly to be used for high-frequency, small-scale retail purchases and transactions.
The e-CNY forms part of the monetary base of the country, which means the digital currency makes up a portion of the ‘cash’ that is in circulation.
Though digital, e-CNY is not considered a type of cryptocurrency as it is not decentralized in nature and does not operate on the blockchain. It is a type of Central Bank Digital Currency (CBDC) that is issued by the People’s Bank of China (PBOC).
What is the value of e-CNY?
The e-CNY has the same valuation as the RMB. Unlike other currencies, the RMB is a fixed exchange rate currency rather than a free-floating currency whose value is determined by the market. The value of the RMB is pegged to currency baskets, such as the China Foreign Exchange Trade System (CFETS) RMB Index, which includes a number of advanced market currencies, including the US dollar and the euro.
Where can it be bought and who can use it?
At the moment, non-Chinese citizens are not able to buy e-CNY. However, there are channels through which foreigners can buy and trade in physical RMB — such as buying RMB in cash or buying RMB currency futures. As the e-CNY has the same value as the physical RMB, this remains an option for foreign investors looking to buy RMB.
Foreigners may be able to use e-CNY through the digital yuan app, however, accessing it outside China’s territory means more restrictions. They must be located in one of the 12 pilot cities or areas and have a bank account at one of the approved Chinese banks. Signing up through WeChat Pay and Alipay-affiliated online banks are possible, but will still need an active Chinese bank account in order to top up these digital wallets.
Digital Yuan vs. Existing Cryptocurrencies
The biggest difference that distinguishes digital yuan from existing cryptocurrencies is that it has legal status. The digital Yuan currency can be used as a payment mechanism or positioned as a legal tender. Digital Yuan currency has a state-formed centralized structure. While multiple assets control existing cryptocurrencies, activities of the digital Yuan are strictly supervised and controlled by the Chinese government.
Another difference between cryptocurrencies and a digital yuan is anonymity. While existing cryptocurrencies can be anonymous to varying degrees depending on the coin, the Chinese government will monitor the use of the currency moving in its economy.
How Will Digital Yuan Affect China’s Economy?
1. Sound financial decisions
The fact that a state follows the flow of money in its economy and is aware of financial activity contributes to making financial decisions more planned. Accordingly, thanks to the digital Yuan, it will better control personal and corporate mobility in financial terms and better monitor the flow of money in the economy.
Cash will remain the predominant transaction method for payments in China. However, payment systems such as QR codes, coin systems, and mobile payments that have recently emerged and become popular will slowly shift to digital money.
2. Fully adapted to digital transformation
Payment firms such as WeChat are becoming the pioneers of this digital transformation. On the other hand, Digital Yuan adapts to this transformation simultaneously and can serve the government’s needs to a large extent through the tracking and token system, which is more accessible than cash.
3. Financial inclusivity
The unbanked population can now participate in the economy. Along with the Digital Yuan, the Chinese government will enable people who do not have access to any bank to join one of the leading economies in the world. Thus, the unbanked population of China can now be heard and will have a voice.
4. Will be a force in the global economy
Another benefit of the Digital Yuan to the Chinese economy is that it will help position the Renminbi to international reserve status. The Chinese currency, which has the second-largest economy globally, will become comparable to the US dollar in the global economy.
In other words, the US dollar has an 88.3% stake in the international economic network, while the Chinese currency renminbi only has a 4% share. However, the digitalization of the currency will change international payments and become a preferred method among international traders and become more popular.
