For what purpose does China issue the digital yuan?

Published:

8 abr 2021 11:11 GMT

The impact of electronic currency would not be limited to finance.

The Chinese government is testing Digital Currency Electronic Payment, or DCEP), a system that will have some characteristics of cryptocurrencies and that the Chinese People’s Bank seeks to present next year.

It is a legal means of payments developed by the central bank and which will be backed by deposits in the national currency. the yuan.

Bitcoin could be driving interest in the digital yuan, according to China's central bank

Commercial banks will be forced to convert part of their assets into yuan into this new digital currency and distribute them between companies and citizens. According to local media, so far four large state banks They have started extensive internal testing of the digital wallet. These are the Bank of China, the China Construction Bank (CCB), the Industrial and Commercial Bank of China (ICBC) and the Agricultural Bank of China.

As part of the DCEP tests, the authorities of the cities of Beijing, Chengdu and Suzhou distributed the equivalent of several million dollars in the form of public raffles held in recent months. Currently the digital yuan can only be used to purchase goods in JD.com, a digital commerce platform and official partner of Banco Popular.

In the future, the currency will be integrated into mobile payment applications such as Alipay and WeChat.

Utility

The DCEP would grant several advantages to the communist government. According to Coindesk, Banco Popular may control the use of funds and subsidies state. For example, if the Central Bank assigns digital funds to a commercial bank to credit small businesses, it could activate these funds in the system not before they reach the recipients. Similarly, illegally obtained digital savings could be confiscated.

Illustrative image

After starting work on developing its digital currency in 2014, China hampered the circulation of cryptocurrencies, including bitcoin, in the country. Cryptocurrency deals were terminated on some 100 Chinese exchanges as of 2017 in accordance with local regulations on fraud and money laundering.

For consumers the digital yuan would mean faster and more comfortable payments using QR codes, while the Government would have an effective tool for monitoring transactions and collecting data on citizens.

Likewise, the new ecosystem would make it possible to avoid risks related to Wechat and Alipay, which represent the 98% of mobile payments in the country, according to Bloomberg. These platforms are owned by private companies, which could jeopardize financial stability if technical or financial problems arise. In addition, there are concerns about the integrity of the personal information users stored in private servers.

Proving ground for a new economy

In a broader dimension, the introduction of the digital yuan is not limited to finance, but is a matter of developing tools for collecting and applying data to foster a smarter economy, based on real-time information.

The digital experiment in China is a testing ground for a trend that should soon unfold in the rest of the world, and the right to issue and control digital currencies could be a new battlefield among developed economies.

While the US has merely conducted theoretical research on the matter, Beijing has taken a step towards converting the digital yuan into a reserve currency.

Despite initial statements by the Government about the orientation of the digital yuan towards the domestic market, the People’s Bank is laying the foundations to use the currency in cross border transactions. In February, the Chinese People’s Bank, together with the central banks of Thailand, the United Arab Emirates and the Hong Kong Monetary Authority, began to develop a project in this area.

While the United States has merely conducted theoretical research on the matter, Beijing has taken a step towards the possibility of converting the digital yuan into a reserve currency.

According to the plans of the Chinese Ministry of Commerce, the testing period of the currency will continue until 2023, although the international press has published information according to which the digital yuan will be available to visitors from the 2022 Winter Olympics in Beijing.

Dmitri Stepin

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