China Creates Its Own Digital Currency, a First for Major Economy

With cyber yuan, the Chinese government has reportedly created a
digital currency controlled by its central bank.

With credit cards and payment apps, money dealings are already
some sort of virtual. But now, China is turning legal tender itself
into computer code, The Wall Street Journal (WSJ) reported on
Tuesday.

By design, the digital yuan will negate one of bitcoin’s major
draws: anonymity for the user, it added.

Central banks across the world, including the People’s Bank of
China (PBOC), are looking at developing digital currencies that
could play a role in making domestic and international payments
faster and cheaper for both large-scale and consumer
transactions.

The PBOC had been working on its digital yuan programme since
2014, shortly after bitcoin gained attention in the country.

How does it work?
From a user perspective, it is rather like China’s existing
commercial digital payment methods, like Alipay and We Chat Pay:
users download digital wallets in which they can store their funds,
and which generate a QR code that can be scanned by payment
terminals in shops.

The digital yuan is designed to replace cash in circulation,
such as coins and bank notes, not money deposited long-term in bank
accounts.

Commercial banks will have a role in distributing the digital
currency to users, and to do so they must deposit exactly the same
amount of their reserves with the PBOC as the digital yuan they
distribute.

Unlike cryptocurrencies like bitcoin, the digital yuan will not
use blockchain, distributed ledger technology which allows
transactions to be validated without the need for banks.

What effect will it have?
Widespread use of the digital yuan may give Chinese policy makers
greater visibility into how money flows around China’s economy.

This would help them track any illicit flows of funds and it
would also allow them to experiment by targeting monetary policy
interventions on specific economic classes, regions or other
groups.

In extreme economic circumstances, it would also allow them to
have negative interest rates for cash.

China has a long-standing aim of internationalising its
currency, and in time, the digital yuan may help with this
initiative, making it easier to encourage users in other countries
to use the yuan.

A digital dollar too?
US Treasury secretary Janet Yellen signaled the Joe Biden
administration supports research into the viability of a digital
dollar, a shift from the lack of enthusiasm shown for the concept
under her predecessor, Steven Mnuchin.

“It makes sense for central banks to be looking at” issuing
sovereign digital currencies, Yellen said at a virtual conference
hosted by the New York Times in February this year.

Over the months, many countries have experimented with digital
currencies, data availabke with the Bank for International
Settlements showed. For instance, Sweden has conducted real-world
trials of a digital krona, and the Bahamas made a digital currency,
the Sand Dollar, available to all citizens.

(With inputs from agencies)

With cyber yuan, the Chinese government has reportedly created a
digital currency controlled by its central bank.

With credit cards and payment apps, money dealings are already
some sort of virtual. But now, China is turning legal tender itself
into computer code, The Wall Street Journal (WSJ) reported on
Tuesday.

By design, the digital yuan will negate one of bitcoin’s major
draws: anonymity for the user, it added.

Central banks across the world, including the People’s Bank of
China (PBOC), are looking at developing digital currencies that
could play a role in making domestic and international payments
faster and cheaper for both large-scale and consumer
transactions.

The PBOC had been working on its digital yuan programme since
2014, shortly after bitcoin gained attention in the country.

How does it work?
From a user perspective, it is rather like China’s existing
commercial digital payment methods, like Alipay and We Chat Pay:
users download digital wallets in which they can store their funds,
and which generate a QR code that can be scanned by payment
terminals in shops.

The digital yuan is designed to replace cash in circulation,
such as coins and bank notes, not money deposited long-term in bank
accounts.

Commercial banks will have a role in distributing the digital
currency to users, and to do so they must deposit exactly the same
amount of their reserves with the PBOC as the digital yuan they
distribute.

Unlike cryptocurrencies like bitcoin, the digital yuan will not
use blockchain, distributed ledger technology which allows
transactions to be validated without the need for banks.

What effect will it have?
Widespread use of the digital yuan may give Chinese policy makers
greater visibility into how money flows around China’s economy.

This would help them track any illicit flows of funds and it
would also allow them to experiment by targeting monetary policy
interventions on specific economic classes, regions or other
groups.

In extreme economic circumstances, it would also allow them to
have negative interest rates for cash.

China has a long-standing aim of internationalising its
currency, and in time, the digital yuan may help with this
initiative, making it easier to encourage users in other countries
to use the yuan.

A digital dollar too?
US Treasury secretary Janet Yellen signaled the Joe Biden
administration supports research into the viability of a digital
dollar, a shift from the lack of enthusiasm shown for the concept
under her predecessor, Steven Mnuchin.

“It makes sense for central banks to be looking at” issuing
sovereign digital currencies, Yellen said at a virtual conference
hosted by the New York Times in February this year.

Over the months, many countries have experimented with digital
currencies, data availabke with the Bank for International
Settlements showed. For instance, Sweden has conducted real-world
trials of a digital krona, and the Bahamas made a digital currency,
the Sand Dollar, available to all citizens.

(With inputs from agencies)