The Digital Yuan and Its Potential Impact on Global Finance
The Digital Yuan (or Yuan in Chinese) is a national currency with the potential to transform global finance. Being promoted by China, this digital currency seeks to improve financial inclusivity while simultaneously lowering transaction costs and curbing illegal activities.
PBOC has joined forces with China’s fintech titans to distribute an electronic currency called CNY (Chinese Yuan). This has reduced transaction costs while speeding up money movement.
It is a digital currency
The Digital Yuan (CBDC) is a central bank-issued digital currency with the potential to reduce transaction costs and combat illicit financial activities, in line with China’s ambitions of becoming a world leader in fintech and next-generation technologies. Furthermore, its development aligns with China’s aim of becoming a top global fintech market player; cross-border trade could benefit significantly as Beijing pushes CBDC adoption with aggressiveness that is raising concerns among Western financial institutions.
The People’s Bank of China is working in cooperation with domestic fintech players such as Alibaba’s and Tencent’s fintech subsidiaries to disperse digital yuan. These companies have made accessing it more readily possible by integrating it with popular apps such as WeChat and Alipay. Furthermore, the PBOC has instructed agencies offering digital yuan services to submit transaction reports regularly allowing it to detect money laundering cases as well as criminal offenses that violate government regulation.
The Digital Yuan was created to strike a balance between user anonymity and regulatory oversight, unlike cryptocurrency which falls outside PBOC control and remains more accessible globally.
It is a national currency
The Digital Yuan is a new form of money designed to allow transactions without intermediaries, eliminate counterfeiting risks and provide security with cryptography and encrypted storage technologies. These features make it impossible for users to double spend or illegally duplicate or counterfeit currency; according to PBOC press releases this feature also raises privacy concerns about surveillance.
Despite these reservations, China’s Digital Yuan currency is growing increasingly popular. The central bank is using pilot programs in various cities to test it. While it was designed to compete with fintech services like Alipay and Wechat Pay, its purpose is not intended to replace them altogether.
Fan suggested that the e-yuan could help alleviate deposit disintermediation, which is a major source of funding for traditional banks. Retail deposits provide one important source of funds.
It is a payment system
The E-Yuan was introduced by China to increase competition in its digital payments arena, where established fintech companies and major Western banks offer strong competition to China’s government-backed currency. Such firms possess first-mover advantage because their payment services have become embedded in apps used daily by Chinese consumers to navigate life’s daily responsibilities. At a time of tension between US-China relations and moves toward de-dollarisation, however, some may react skeptically or negatively towards such efforts by the People’s Bank of China (PBOC).
Contrary to cryptocurrencies, digital yuans offer a form of “controllable anonymity”, providing protection from commercial players but maintaining transparency for regulatory authorities (PBC 2021). Furthermore, these currencies were designed specifically to support offline transactions; their success has drawn the interest of global central banks seeking ways to modernize their financial infrastructures and become players in the digital economy.
It is a digital wallet
Digital Yuan can be used on non-smartphones (known as “dumb phones” in China) and linked with multiple cards or ID documents – meaning foreigners without bank accounts in China can easily gain access to its widespread mobile payment infrastructure, particularly useful during tourism as it helps reduce transaction costs and simplify international payments.
Contrary to cryptocurrencies, which provide total anonymity, e-CNY provides “controllable anonymity,” or protection from commercial players and regulatory authorities (PBOC 2021). Furthermore, its near-field communication technology facilitates easy use on offline devices.
The People’s Bank of China’s goal for digital yuans is to increase financial inclusion, lower transaction costs and combat illicit activity. They also wish to reduce reliance on US dollars which may expose their countries to interest rate adjustments and sanctions; but it also gives the PBOC greater control over personal data while raising cybersecurity concerns.
