Understanding China‘s Digital Yuan

China joins the league of countries like Sweden, Russia, India, and Nigeria with the launch of its digital currency.

In April 2020, the People’s Bank of China (PBOC) started the first trial of the Digital Yuan.

Officially called the Digital Currency Electronic Payment (DC/EP) and widely called the e-CNY, the digital Yuan is a virtual version of the Renminbi (RMB).

The e-CNY is designed for high-frequency, small-scale retail purchases and transactions.

The e-CNY is a digital equivalent of China’s fiat and not a cryptocurrency or token.

China's central bank has approved seven commercial banks and two online financial institutions (only) to conduct e-CNY-related services.

In April 2022, the People's Bank of China announced that the digital Yuan will now cover eleven more cities in China, including six cities in Zhejiang Province.

Since the first trial of the e-CNY, the government has continued to push out the digital currency to increase usage and mass adoption.

The Southern city of Shenzhen distributed 30 million Yuan worth of e-CNY to cushion the effect of the CoronaVirus.

As of 2021, transactions involving the e-CNY have risen to about 87.6 billion Yuan with over 261 million holders.

Keywords: China, Digital, Currency, e-CNY, Bank of China, central bank, Yuan

Recently, China joined the league of countries such as Russia, India, Nigeria, and Sweden, whose Central Bank has issued a digital currency. Even though the conditions that necessitated the launch of these digital currencies vary among the countries, they all have a singular motive. The binding reason is to have a crypto token that will be regulated by the government and serve as a viable alternative to the prominent tokens.

With an estimated population of about 1.4 billion in 2022, it is expected that the launch and adoption of China's Digital Yuan will surpass the estimated projections.

This article will identify everything you need to know about China's digital Yuan.

Let's begin!

The e-CNY; China’s Digital Yuan

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Image: South China Morning Post

In April 2020, the People's Bank of China (PBOC) (also called China's Central bank) began the first trial of China's digital Yuan. The PBOC launched the internal testing of the digital currency in four cities of the Republic of China.

The China Digital Yuan, e-CNY is officially called the Digital Currency Electronic Payment (DC/EP) and is the virtual version of the Renminbi (RMB), China’s legal currency. At the launch of e-CNY, it was designed to be mainly used for high-frequency, small-scale retail purchases and transactions.

To use the e-CNY, you must be located in one of the 12 pilot cities and have a bank account in one of the approved Chinese banks.

The e-CNY has a digital yuan app or wallet that can be accessed online. The wallet currently has restricted functions for foreigners because you need a Chinese identity card to engage in some advanced wallet options.

The People’s Bank of China (PBOC) has approved seven commercial banks and two online banks to provide e-CNY-related services to the People of China. The commercial banks are the Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications, Postal Savings Bank of China, ICBC, and China Merchants Bank. The online banks are WeBank (WeChat Pay) and MyBank (Alipay).

Why China is Developing A Digital Renminbi

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Since 2014, China has been developing a digital currency. In 2020, they reached a milestone and launched the digital currency in Shenzhen, Suzhou, Chengdu, and Xiong’an. The currency has since then been established in other major cities in China and Hong Kong. The Peoples Bank of China has hinted that the digital currency will be used in the Fall 2022 Asian Games and the 2022 Winter Olympics.

The renewed and vigorous effort by China to ensure the digital RMB gains prominence leaves us with the question of “why is China vigorously developing the digital RMB?”

The first reason would be that China wants its currency to be widely used for cross-border transactions. Like the dollars and euros, China wants the Yuan or digital equivalence to become prominent for international trade. Research shows that the e-CNY has more prospects of achieving this goal.

Similarly, Beijing's long-term goal is to boost the yuan’s relatively common use outside the Chinese domestic market. While the likes of the US dollar, and Euro accounts for 40% and 35% of international payments, the Renminbi accounts for distant 3%.

The digital Renminbi has the potential to trigger more usage of the China currency in international trades and payment.

Another reason for the vigorous development of the digital Yuan is for the Chinese Government to limit the power and market share of commercial financial institutions and digital payment corporations.

For instance, Beijing wants to reduce the power and market share of independent payment corporations such as Alipay owned by Alibaba, and WeChat pay owned by Tencent. The development of the e-CNY is expected to reduce Alipay which controls about 50 percent market share and WeChat Pay which controls 40 percent market share.

China’s Attitude Towards Crypto

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Since 2009 when Bitcoin launched, China already had a zero adoption policy toward crypto.

They aimed some bans at video-game currencies claiming that they were devaluing the Yuan.

Then four years later, in December 2013, the central bank of the People's Republic of China issued a notice against Bitcoin. They banned banks from handling Bitcoin-related transactions saying Bitcoin had no real value and was unregulated.

Barely a year after, in 2014, it turned out that the earlier ban was false. However, the damage had been done as the FUD led to many people liquidating their digital assets.

In 2017, with China battling a weakening Yuan, the government made some drastic moves. First, they banned ICOs and afterward, drove crypto exchanges away from the country. Their reasons were that ICOs and exchanges were fronts for illegal financial activities.

Two years later, the National Development and Reform Commission (NDRC) confirmed a Bitcoin mining ban. Bitcoin mining was alleged to be a significant source of pollution in the country.

In 2021, crypto trading was banned entirely in China.

In a surprising turn of events, in 2022, a Shanghai High People’s Court affirmed Bitcoin as legal virtual property. This made crypto legal once again.

The Technical Logic Adopted By Digital RMB

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Since 2014, the People Bank of China has been conducting research on the best technicalities to deploy for the digital Renminbi. They eventually settled for digital tokens that use distributed ledger technology (DLT).

The distributed ledger technology is part of the blockchain technology that provides a digital currency. The technology will boost much greater security and remove the possibility of counterfeiting.

The distributed ledger technology used in the digital Renminbi comes with decentralization and anonymity. However, the deployment of the digital currency combines the centralized nature of the distributed ledger technology with the centralized management of the People's Bank of China. That combination is called the Digital Currency Electronic Payment (DCEP).

The DCEP works such that if commercial banks, payment platforms and individuals can not trace the block chain transactions, the central bank will be able to monitor and trace the transactions.

Exploits Of The e-CNY Since Public Launch

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Image: CNBC

Even though the e-CNY is in its pilot stage, the scope of the trial of this digital currency has expanded since its launch in April 2020. Some of the exploits that necessitated the expansion include:

Shortly after the CoronaVirus pandemic, one of the badly hit countries is China. To cushion the effect of the pandemic and stimulate consumption in the economy, the Southern city of Shenzhen began distributing 30 million yuan in its digital currency. That is the distribution of 30 million Yuan worth of e-CNY or $4.5 million in e-CNY.

Similarly, Xiong’an, a new area in northern Hebei province, began a campaign to dole out 50 million Yuan worth of e-CNY “red packets” as gifts. These gifts are expected to increase the use and circulation of China's digital Yuan and ease the people's livelihood.

According to the Central Bank, transactions involving the e-CNY totaled about 87.6 billion Yuan, with over 261 million individual digital wallet users at the end of 2021.

To make the e-CNY transactions transparent and attract more users, China started issuing cards with a small LCD (display) screen showing the amount a user has left in their e-CNY account. These cards can perform financial transactions without an internet connection.

In another campaign, consumers in Shenzhen can participate in a lottery and get free e-CNY. They can use the digital Yuan to shop online or in stores. Asides from some of these friendly policies and campaigns by the government to ensure the wide adoption and expansion of the e-CNY, experts and industry players are also lending their voices.

G. Bin Zhao, a senior economist at PwC China, said, “ in the future, the government can use e-CNY for pension payments, fiscal subsidies, and even infrastructure spending.” He added, "with e-CNY, the cash directly lands in your hand.”

Digital RMB Pilot Cities and The Projects.

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On April 2, 2022, the Central Bank of China made a new announcement about expanding the pilot areas of the Digital Yuan transactions. It announced that eleven more cities will now be covered, including six cities in Zhejiang Province.

These cities will host the 2022 Asian Games likewise the expansion to the Beijing and Hebei Province that hosted the 2022 Winter Olympics cum Paralympics event. The Pilot area now becomes 23 cities.

The statement further reads that Tianjin, Chongqing, Guangzhou, Fuzhou, Xiamen, and six cities in the coastal Zhejiang province will be included in the existing 10 major "pilot" cities to test the use of the digital RMB.

It is important to know that these six cities in Zhejiang and the Provincial capital of Hangzhou will play host to the Asian games that are scheduled to start in September 2022.

The sporting event will be a meeting point for athletes across the world and the adoption of the digital currency in such an event will trigger its global adoption. These events will be a test for the use of the e-CNY.

Conclusion

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Richard Turrin, an expert on China’s digital currency, said, “ mechanisms like this fill in gaps where fintech companies cannot. They provide a secure, government-backed, free or near free, immediate money transfer.”

Even though the e-CNY is not a cryptocurrency, it continues to serve as a viable medium of exchange and transaction devoid of imbroglios that have characterized the fiat currency. Experts are optimistic that the money will be available to non-Chinese soon.

Author: Valentine. A, Gate.io Researcher

This article represents only the researcher's views and does not constitute investment suggestions.

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