Central Bank Digital Currencies (CBDCs) are gaining ground around the world, with all countries involved beginning to understand the need to issue digital versions of their currencies. This race is led by China, whose project is becoming increasingly concrete thanks to its strong economic and technological power. The country is currently working on developing and organizing the use of its virtual currency: the digital yuan. China plans to make this currency available nationwide by 2022, and to enable its use during the 2022 Beijing Olympic Games.
China and cryptocurrencies
China's policy on cryptocurrencies and their use is somewhat tricky. In 2017, China made projects involving the use of cryptocurrencies highly complex and even unfeasible. Indeed, the world's second-largest power had taken the decision not only to crack down on cryptoasset trading and exchanges, but also to outlaw Initial Coin Offer (ICO) on its territory. Initial Coin Offerings are fund-raising campaigns to finance a cryptocurrency company's project. The principle is the same as that of an ordinary fundraiser, the only difference being that tokens are purchased and then converted into fiat currency, enabling the financing and launch of the plan. This is a very common method of financing in the rest of the world. Since the funds are raised over the Internet, it goes without saying that any individual is free to participate if he or she so wishes. China chose to ban ICOs because it considered that they represented illegal fund-raising practices and could serve the interests of criminals by enabling them to launder money.
Nevertheless, as one of the world's leading countries, China could not afford to ignore the digitalization of our era and observe the cryptocurrency market from afar. It's for these reasons that since 2014, the country hasn't skimped on the research and development of an alternative: central bank digital currencies (CBDCs). These currencies are nothing more than a digital version, a virtual representation of the fiat money we use today. They are, as the name suggests, issued by a central bank, unlike cryptocurrencies, which are not issued by the state. This digital currency project is closely inspired by Bitcoin. At the time, China was already planning to seize the opportunity offered by blockchain technology to accelerate its development and use it as a basis for innovation, and the Digital Currency Research Institute was set up to continue this research and ensure optimal development of the project.
The MNBC produced by China's central bank proved to be a security measure, in the face of the threat posed by virtual currencies created by private companies such as Libra from the international Facebook corporation. China was considering the idea of launching the digital yuan in 2020 in certain areas as a full-scale test.
The Digital Yuan
The Digital Yuan, also known as DCEP (Digital Currency Electronic Payment), is the digital currency issued by China's central bank. It is the perfect equivalent of the yuan (Renminbi) currently in use (one digital yuan = one fiat yuan). China is leading the race to create a state-owned digital currency, as other economic powers such as the European Union and even the USA are still dithering on the subject.
How does the digital yuan work?
This virtual currency will be distributed in two stages. First, the Chinese Central Bank will produce the currency, then entrust it to commercial banks, which will make it available to individuals. To be able to use this currency, consumers will need to download an application similar to those used by commercial banks; a sort of digital wallet. In China, cash payments have all but disappeared, most of them replaced by digitized solutions via a simple smartphone thanks to systems implemented by some of the GAFAMs, namely Alibaba and Tencent. The crypto-yuan is set to reinforce the digitization of the Chinese economy, gradually replacing physical currency and cutting operating costs.
What were the reasons for creating this virtual currency?
The reasons for creating this digital currency are mainly political and economic. The aim of this currency is to dethrone the US dollar, which is currently the world's main reserve currency. The greenback is at the heart of almost half the world's trade, and China, which is engaged in a perpetual economic and technological war with the United States, believes it should no longer be dependent on the American economy. This is a good way for the country to strengthen its grip on the global economy and consolidate its position on the world stage.
Another aspect motivating the realization of this project is the prospect of absolute financial control and supervision. The digital yuan was created to enable the state to monitor people's spending in real time. As we know, the Chinese population is constantly monitored by the government, whether via the Internet or the latest technologies. Artificial intelligence (AI)-based systems monitor citizens' every move, thanks in particular to facial recognition. They allow the population to be rated according to good and bad deeds, to "encourage good social behavior". The more Chinese citizens use this virtual currency, the more the government will be involved in their private lives by scrutinizing their data, as the use of the digital yen will be monitored and every trace will be analyzed in order to obtain as much data as possible on the Chinese population.
This currency will give China an extra edge in the fight against fraud, corruption, money laundering and tax evasion.
Concerns about the production and storage of Chinese fiat currency are also a factor, as is the desire to increase competition in the field of electronic payments. Nevertheless, one of the main motivations for this project is in fact the eradication of mining in the country's Inner Mongolia region. Mining communities are particularly attached to this region because of its low energy costs. Bitcoin mining is therefore likely to be banned in the coming years, which would have a major impact on the development of this cyptoactive since China holds over half of the world's Bitcoin mining capacity and is a major player in the development of this cryptocurrency. As proof of this, a recent power failure in the north-west of the country caused hash rates to plummet in the region's mining pools.
What are its competitors?
WeChat Pay: This application is an ecosystem that enables Chinese consumers to chat, surf the web and make payments. This application does not require a local entity and currently has over 600 million active users.
Alipay: Alipay is a modern payment solution created by Alibaba.
Diem (Libra): Formerly known as Libra, this is the virtual currency that Facebook plans to create. It will enable users to transfer or receive money via applications such as Facebook, Messenger and WhatsApp.
Regulations linked to the emergence of the Digital Yuan
On October 23, 2020, the People's Bank of China (PBOC) published a draft law amending the "Law of the People's Republic of China on the People's Bank of China". This law describes changes to the organizational structure, powers and restrictions of the People's Bank of China. It states that "the renminbi comprises both a physical and a digital form". The aim of this bill is to officially democratize payments via digital yuan, and if it comes to fruition, this currency will become a legal tender of the Chinese state. On the other hand, the bill also aims to regulate the issuance of cryptocurrencies or stablecoins wishing to compete with the digital yuan. If the digital yuan is recognized as China's official cryptocurrency, any stablecoin backed by the yuan will be banned. This would have disastrous consequences (fines and complete destruction of tokens), particularly for the stablecoin company Tether, which has specially designed a stablecoin linked to the digital yuan, the CNHT, in competition with the USDT, which is the stablecoin backed by the US dollar.
The first steps of the digital yuan
In order to assess citizens' behavior with this currency, the Chinese nation organized a test in the form of a giant lottery in the city of Shenzhen on October 12, 2020. 200 Renminbi (the official name of China's currency) in digital yuan were distributed to selected candidates for them to spend and, at the same time, provide the authorities with information on the use of this currency by the Chinese people. In the same city, vending machines were installed by the Agricultural Bank of China to convert traditional yuan into digital yuan. Another similar test was carried out in December of the same year, this time in the city of Suzhou during a major sales day. Vouchers in digital yuan were distributed to randomly selected citizens. With the multiplication of exchange interfaces (mobile application, bank card, cash dispenser), the DC/EP system is increasingly materializing in the real world.
Current development strategy
The digital yuan aims to strengthen China's economic position against its eternal rival, the United States. But for this project to succeed, the digital yuan would have to be accessible and convertible in every country, which is far from being the case yet. However, a number of projects are in the pipeline to achieve this goal. One such project has already been launched to test its effectiveness.
The city of Hong Kong is the scene of a partnership with the country in the sense that it is the first to agree to include the digital yuan in its border payments. According to an article by the head of Hong Kong's monetary authority, the city's ambition is to evolve and improve its payment systems, and the digital yuan is a promising means of realizing this ambition.
China is even considering collaborating in the future with African countries interested in the digital yuan to boost their own economies and accelerate financial inclusion. It is believed that this virtual currency will gain a foothold on the continent with ease, as the majority of network infrastructure, smartphones and new technologies serving African nations are supplied and financed by China.
For the time being, however, China is concentrating on developing the local use of its virtual currency.
Where can you use digital yuan to make payments these days?
JD.com, one of China's largest online retailers, will be the country's first online trading platform to use the digital yuan. Since December 2020, a protocol has been in place to give customers the right to pay for certain items using digital yuan. The platform will thus be the first to accept this virtual currency. In fact, it was with JD.com's help that lotteries were organized in a number of Chinese cities. The support of the virtual shopping mall is a major asset for the People's Bank of China and the development of its digital currency.
A contract with Chinese giant Huawei will enable consumers to purchase the firm's new product, the Huawei mate 40 smartphone, which will feature an integrated hardware wallet for the Chinese Central Bank's digital currency.
In the hope of one day taking the place currently occupied by the US dollar, China is making every effort to develop and accept its virtual currency: the digital yuan. This project, which is currently national in scope, plans to be fully operational by 2022, in time for the Olympic Games.
