Since 2014, the People’s Bank of China (a.k.a. PBOC or PBC) has been developing a central bank digital currency (CBDC) known as the digital yuan (e-CNY), or “digital currency electronic payment” (DCEP). China is home to the world’s second-largest economy. With a population of over 1.4 billion people, the country is an ideal location to pilot a CBDC project. The digital yuan is now being piloted in several major Chinese cities, with billions of dollars in transactional volume recorded. However, the extent to which e-CNY uses blockchain or other types of distributed ledger technology (DLT) is unclear.
In this article, we’re going to dive deep into the digital yuan (e-CNY). We’ll explore how this digital currency works and how it benefits the People’s Bank of China. Also, we’ll discuss the concept of CBDCs more broadly and some of the potential drawbacks they pose. Additionally, we’ll take a look at some of the other nations exploring CBDCs and what it could mean for the crypto and Web3 space.
Exploring CBDCs
As the name implies, a central bank digital currency, or CBDC, is a form of digital currency issued by a central bank. It serves as a digital form of a local fiat currency and we can compare it to cryptocurrencies. However, some CBDCs are being developed in response to the growing popularity of cryptocurrencies such as Bitcoin. To understand how CBDCs work, it’s worth considering the fiat currencies they represent.
Fiat currencies are government-issued currencies not backed by any underlying asset or commodity. Until 1971, it was gold that backed the US dollar at $35 per ounce. However, on August 15th, US President Richard Nixon announced that the United States would abandon the gold standard and the fixed value conversion of gold to dollars.
So, they printed paper banknotes as receipts for gold that could be convertible at any time. However, monetary and fiscal policies such as fractional reserve banking made the conversion of gold illegal in many countries throughout history, leaving just the coins and paper banknotes.
Moreover, fiat currencies use a credit-based model that facilitates fractional reserve banking and other modern monetary and fiscal techniques. In essence, this allows governments and central banks to adjust the money supply whenever they see fit. Many economists cite the US ditching the gold standard as a catalyst for the various economic crises in the following decades.
Cashless Society
CBDCs make sense in many ways when considering that many parts of the world are moving towards a cashless society. Even before the COVID-19 pandemic, several countries began favoring cashless payments for convenience and hygiene reasons. In this regard, CBDCs provide a new framework on which central banks and governments can begin digitizing fiat currencies. Additionally, CBDCs could help to promote financial inclusion by “banking the unbanked”. Moreover, CBDCs aim to enhance privacy, security, and accessibility for businesses and consumers while eliminating the costs associated with printing and pressing physical currency.
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What is the Digital Yuan (e-CNY)?
As a central bank digital currency (CBDC), the digital yuan (e-CNY) enables the People’s Bank of China (PBOC) to digitize currency and replace some of the cash in circulation. Further, the digital yuan allows China to move towards a cashless society. Moreover, as the use of cash continues to decline, it makes sense to move towards a digital currency. CBDCs allow central banks to save on money by removing the need to produce physical notes and coins.
Furthermore, CBDCs, such as the digital yuan, help to prevent counterfeiting and illegal activities. Plus, they can make payments more efficient. The digital yuan aims to create a competitive payments sector and help to reduce the concentration of power among tech giants such as Alibaba and Tencent. Reducing the systematic risk will help to minimize the damage to China’s economy should either of these companies go bankrupt.
The digital yuan is price-pegged to the yuan (RMB). Furthermore, China has distributed millions of dollars worth of digital yuan to citizens of several major cities via a government-led lottery in conjunction with commercial banks and payments providers Alipay and WeChat Pay. Moreover, participation requires citizens to download a “digital wallet” app on their smartphones that let them send and receive payments using QR codes.
Is the Digital Yuan a Cryptocurrency?
While some CBDC programs are adopting the technology, the digital yuan does not use blockchain and is not a cryptocurrency. Cryptocurrencies such as Bitcoin use decentralized public blockchains, which provide immutable ledgers of transactions with no single point of failure. However, the digital yuan is issued by a central authority and is not decentralized.
Some analysts suggest that the development of CBDCs is becoming a priority for central banks. Moreover, the rise in cryptocurrency adoption threatens to disrupt the status quo and cause instability in the current financial system. To tackle this, central banks such as the PBOC are issuing CBDCs using “wallets”, but these wallets cannot interact with blockchains.
The specifics of the technology underpinning the digital yuan are shrouded in mystery. Therefore, it is difficult to say exactly how it works under the hood. However, the digital yuan is traceable to each user, whereas public blockchains like the Bitcoin network provide anonymity.
Other Countries Exploring CBDCs
The digital yuan is the most developed CBDC initiative to date. With billions of dollars of trading volume under pilot schemes, the e-CNY may be the first to take flight. Nonetheless, several other nations are experimenting with different implementations of CBDCs. Below, we take a look at some of the other countries involved in CBDC initiatives.
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The UK
As the Chancellor of the Exchequer under UK Prime Minister Boris Johnson, Rishi Sunak announced his ambition to make the country into “a global hub for crypto-asset technology“. As the youngest prime minister in over 200 years, Sunak is uniquely positioned to drive investment in Web3 technologies and promote the adoption of cryptocurrencies.
Sunak is responsible for implementing several crypto initiatives, including the use of CBDCs and stablecoins. The new prime minister cites cryptocurrencies as a tool for helping the UK remain competitive as a global financial center. Also, Sunak expects to be involved in creating regulatory clarity to support the safe adoption of Web3 technologies.
Moreover, Sunak is touted as one of the most crypto-friendly leaders of any major nation. In 2021, Sunak ordered UK’s Royal Mint to develop a government-backed NFT (non-fungible token). In addition, he has been instrumental in developing the “Financial Services and Markets Bill” to give UK businesses the confidence they need to adopt Web3 technologies.
India
In early 2021, India’s Finance Minister Nirmala Sitharaman announced that the Reserve Bank of India (RBI) would introduce a digital rupee in the next financial year. As one of the largest global economies, India could become a leading player in the CBDC race. Also, the digital rupee could help India become competitive in the payments technology space.
Though details of the digital rupee scheme are in short supply, the project aims to reduce the cost of the existing currency management system while creating a regulatory framework for digital assets. Furthermore, the initiative will help to stop cryptocurrencies from disrupting the nation’s local fiat currency.
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Russia
The Bank of Russia has been developing the digital ruble since 2017. Russia’s central bank hopes the CBDC project will provide a convenient alternative to existing payment methods. Plus, it will help to increase exposure to financial services in rural areas with limited infrastructure.
Furthermore, the digital ruble aims to minimize Russia’s reliance on foreign currencies such as the US dollar. The scheme uses a “hybrid platform” with various elements of distributed technology (DLT). The Bank of Russia is working in partnership with twelve major Russian banks to roll out the CBDC project.
Some analysts predict that the Russian CBDC offering could make it easy for the nation to circumnavigate economic sanctions. In light of the ongoing invasion of Ukraine, the digital ruble could prove to become an essential tool in evading pressures from the West. Nonetheless, Russia is one of many nations exploring CBDCs.
Benefits of CBDCs
One of the key benefits of a CBDC, such as the digital yuan, is that it removes many inefficiencies of modern banking. In traditional finance, payments usually rely on intermediaries to connect different bank accounts. However, CBDCs allow for fast, direct payments. Though CBDC wallets or accounts may not be tied directly to user bank accounts, they allow central banks to identify senders and receivers of all payments made using the network. Plus, they help to identify criminal activities and money laundering. Also, using CBDCs could minimize payment fees for international transfers while providing cheaper, faster alternatives to existing payment methods.
Downsides of CBDCs
While CBDCs may reduce inefficiencies, there are several potential drawbacks to consider. For example, CBDCs could make it easier for governments to conduct surveillance programs. Furthermore, because CBDCs don’t use decentralized open-source technologies, there is no way of knowing how much data they could leak. In theory, CBDCs could enable governments to take money away from citizens, especially if it’s under the guise of preventing crime or terrorism.
How CBDCs Affect the Crypto Industry
One of the biggest reasons for central banks to develop CBDCs is that it helps them maintain power over how individuals use currencies. The development of CBDCs will likely help to create regulatory frameworks for cryptocurrencies in different countries. One of the benefits of this is that it helps to legitimize the Web3 industry. Also, it makes it easy for investors to allocate part of their portfolios to crypto assets.
On the other hand, while CBDCs might help in creating legislation, they could also help promote the benefits of decentralized currencies such as Bitcoin. One thing that many analysts agree on is that CBDCs promote awareness of blockchain and cryptocurrencies. The extent to which CBDCs rely on blockchain is dubious. However, the fact that many are being developed in response to cryptocurrencies suggests that central banks are moving quickly to counter any further disruptions that decentralized digital currencies might pose.
All You Need to Know About the Digital Yuan (e-CNY) – Summary
Millions of Chinese citizens are already using e-CNY wallets and have transacted billions of dollars worth of the digital yuan. The digital yuan appears to be the CBDC with the most significant development to date, beating many of its competitors to production. Furthermore, the growing popularity of cryptocurrencies is prompting central banks and governments around the globe to consider how they prevent decentralized currencies from disrupting the status quo.
Moreover, previously crypto-skeptic nations appear to be expediting their CBDC offerings to prevent cryptocurrencies such as Bitcoin from rising to dominance further. However, the development of CBDCs is likely to help establish a regulatory framework that aids in the mainstream adoption of crypto assets beyond CBDCs, like the digital yuan. Plus, the similarities between CBDCs and cryptocurrencies are already sparking debates and raising awareness about Web3 technologies.
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