Blockchains and cryptocurrencies have evolved from abstract inventions into one of the most popular methods of structuring finances. Now one of the biggest economies in the world, China, is unveiling its own digital currency.
The ambitious “Digital Currency/Electronic Payments” (DC/EP) project was introduced in 2014, and since then China’s central bank has been working tirelessly to digitise China’s existing monetary system and cash circulation. Despite the fact that international authorities have expressed concern about Libra and its potential to influence Facebook’s enormous user base, in April 2020, China conducted a real-world test of its national digital currency. This landmark event was the result of China’s central bank’s five years of rigorous research. The pilot project, conducted in four of China’s largest cities, is a clear indication that China is miles ahead of the United States with regards to the development of what is likely to become a central component of the digital global economy. The DC/EP plan has been formally adopted into the four cities’ monetary systems,with some government employees and civil servants set to receive their salaries in the form of digital currency from May 2020.
Chinese citizens are not new to online payment methods and platforms such as Alibaba’s Alipay and Tencent’s WeChat Pay are commonly used however, they are yetto replace paper currency. The new system, proposed by DC/EP, is unlike any Chinese citizens have used before. It allows customers to make transactions without internet connection and its“touch and touch” function allows users to simply touch their mobile devices together to make a purchase. This effectively cuts out the third party or banking organisation currently required to authorise online transactions.
The main difference between the DC/EP system and Bitcoin is that the former does not utilise blockchain technology. Instead, it operates through a two-tier operating system. The People’s Bank of China issues the DC/EP system to commercial banks and other commercial operating agencies without using blockchain, but lenders and certain agencies are allowed to use the technology in order to distribute the digital yuan to the population.
The advent of digital currenciesmight degrade the efficacy of US sanctions, limiting the country’s options to respond to national security threats from Iran, North Korea, Russia, and others. According to the Foreign Affairs, it may hamper US financialauthority’s ability to track illicit fiscal flows. Digital currencies alsoadvance the goal of shunningUS dollar transactions and US financial oversight, by providing a scalable cross-border mechanism that circumvents the current system.Furthermore, the digital yuan will play a critical role in expanding such efforts – bolstered by China’s clear interest in facilitating international commerce in a way that undermines US influence and expands its own. Nevertheless, according to the Economist,it will take several years for the digital yuan to replace even 10% of the physical cash circulating in China.