While most countries are exploring the idea of implementing digital currencies, China and some other countries are already testing out their own versions. The blockchain industry is set to be revolutionised as China rolls out its digital yuan.
The digital yuan represents the first Central Bank Digital Currency (CBDC). There’s no doubt that China is leading the charge in both the development and implementation of this new digital currency, captained by the People’s Bank of China.
CBDC’s offer the potential to be a massive step towards creating cashless societies, so we’ll take a look at what they are and how they differ from cryptocurrencies, how the digital yuan comes into the picture, and what they mean for the future of the digital economy.
What is a CBDC?
Like fiat currency, central bank digital currencies are issued by central banks or reserves. These are essentially the central authorities that manage the currency and monetary policies of a country or state. Instead of printing physical cash, Central banks issue CBDCs as private digital currencies.
The purpose of these central bank digital currencies is to transfer value via digital transactions, all of which occur on a private blockchain network, otherwise referred to as permissioned blockchain networks.
According to Forbes, “CBDC has legal tender status, and private citizens would hold a direct claim on public money, next to their claims on private money via the banking system.”
The innovation of CBDCs is seen as the next step to address the flaws that are currently in place between the digital and analog infrastructure.
According to Ripple’s report, the primary goals in CBDC creation are varied but include “overcoming limitations of existing payments infrastructure, promoting financial inclusion, boosting competition or fostering innovation.”
CBDCs Vs. Cryptocurrencies: what’s the difference?
They’re both digital currencies, but that’s where the similarities end.
The biggest differentiators between the two are their use cases, decentralisation, blockchain types and anonymity.
While crypto can be used to pay for goods and services, much of the interest in these cryptocurrencies is to trade for profit with the speculation that the price of the asset will increase in the future.
CBDCs, on the other hand, are solely able to be used for monetary transactions.
Perhaps not surprising, given that rules surrounding CBDC transactions are decided by a central bank. In contrast, crypto rules are at the whim of the user database who must reach a consensus on any major decisions.
The identity of CBDC users will be available the same way a standard bank account user’s details would be to that central bank, unlike the anonymity of cryptocurrency users. This comes down to blockchain types. While CBDCs use the centralised structure of permissioned blockchains, cryptocurrencies use public ones.
CBDCs vs stablecoins
Though functionally similar, as they both represent fiat in the form of a digital coin, CBDCs and stablecoins are rather different.
Stablecoins are typically handled under a private entity like a company and are not monitored or controlled by a country, unlike CBDCS.
Will CBDCs replace the currency we use today?
Most countries consider digital currencies to be an additional form of money, rather than a substitute for the existing financial infrastructure. This may change in the future, however, if the use of CBDCs is deemed to be a success.
What is the digital yuan?
China’s central bank, the People’s Bank of China (PBoC) is in the process of developing the digital yuan which is a version of the normal Chinese currency, yet it is deployed on a blockchain. It is legal tender, which means it must be legally accepted if offered in payment of a monetary debt (i.e. paying for goods or services, paying a tax bill).
At the World Economic Forum, China’s project lead for digital trade stated “The use of cash is decreasing. Eventually, cash will be replaced by something in digital format. That is one of the big drivers behind this.”
Already leading the way in being a minimal-cash society, the digital yuan will only speed up the process of this within China.
How will the digital yuan work and be implemented?
Real-world trials have already begun for the digital yuan in Chinese cities including Shenzen, Suzhou and Chengdu. Already, millions of dollars worth of digital yuan have been distributed through a lottery system.
Some of China’s biggest e-commerce platforms have participated in these trials, accepting digital yuan as a form of payment.
In practice, the PBoC will distribute the currency to the nation’s commercial banks. They in turn pass it on to the people through exchange of physical currency.
How will digital yuan and other CBDCs impact us?
The potential impacts of CBDCs are vast.
China has some of the highest percentages of bankless individuals. The CBDC gives these individuals access to banking infrastructure.
Looking further, there are globally 1.7 billion unbanked individuals. CBDCs offer more effective ways for governments to pay stimulus and benefits to their citizens.
CBDCs also offer more efficient payment systems and infrastructure, by improving the speed and efficiency of payments.
Simultaneously, they also offer the ability to foster innovation while encouraging competition by reducing barriers to entry to access global markets.
It’s speculated this is the first step in our transition to a cashless society, not just within China but globally. If Central Banks wish to remain relevant as alternative currencies continue to rise in prominence, CBDCs offer a means to do this.
When will we be able to use CBDCs
This is yet to be decided, but it’s looking like the full launch of the digital yuan will be in February 2022.
China’s financial infrastructure, and current domination with blockchain technology, means they are far ahead of many other nations in releasing these new currencies. Development actually began on the project in secret back in 2014, when it was known as Digital Currency Electronic Payments, or DCEPs.
In October of 2019, President Xi Jinping would go on to formally lay out their 5-year plan for spearheading blockchain adoption, in an unprecedented speech given by no other nations before.
They have since gone on to announce the beta release, set to be launched in the second half of 2021, setting them well on their way to a successful 2022 launch – roughly 3 years ahead of schedule.
It’s highly likely that China will be the first country to issue a central bank digital currency available to all its citizens.
Given the “complicated” relationship between the West and China, it’s safe to say that the digital yuan won’t be readily available to people in Australia, the US and Europe.
What remains to be seen then, is whether there’s a major world economy capable of catching up, and what form exactly that would take.
US, Europe and Australia CBDCs
The United States Federal Reserve (central bank) is currently looking into the possibility of developing their own digital currency. They are in the process of releasing a research paper that explores a move from the traditional US dollar to a digital version of the dollar.
The European Central Bank (ECB) distributed a report in 2020 that proposed the concept of a digital euro and will decide on whether to pursue a formal CBDC project by mid-to-late 2021.
Australia’s central bank, The Reserve Bank of Australia, is partnering with the largest bank in the country, Commonwealth Bank to explore the implications of a CBDC using distributed ledger technology.