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China’s Digital Yuan: Development Status and Possible Impact

Governments around the world are exploring the viability of digital currency. China is at the forefront and is expected to launch the world’s first Central Bank Digital Currencies (CBDC). Its sovereign digital currency program, dubbed Digital Currency Electronic Payment (DCEP), has launched one of the largest real-world trials in several cities over the last few months. By May 2020, China had already filed more than 120 patent applications for its official digital currency, more than any other country.

This April, China’s central bank, the People’s Bank of China (PBOC), gave the green light to conduct hypothetical-use tests of the digital yuan in several regions – Xiong’an, Shenzhen, Suzhou, Chengdu, and the Beijing 2022 Winter Olympic Games locations. The list will also add Shanghai, Changsha, Hainan, Qingdao, Dalian, and Xi’an in the future.

Distributing the digital yuan to commercial banks

China’s central bank is responsible for issuing and distributing the digital yuan to commercial banks. Commercial banks will then channel the digital money to end users. So far, China’s four major state-run banks have started large-scale internal testing of the digital RMB wallet.

 This August, and accidentally temporary launch of of CCB’s official APP offered a glimpse of what a digital RMB wallet could look like. On the wallet management page, the digital RMB wallet would have a wallet ID, a current balance, a balance limit, a single payment limit, a daily cumulative payment limit, an annual cumulative payment, a daily remaining amount, and an annual remaining amount.

On October 23, 2020, the PBOC published the revised draft of the People’s Bank of China Law, laying the legal foundation for sovereign digital currency. The draft law proposed that legitimate currency can be digital currency, giving digital yuan the same legal status as physical yuan.

 Internally, the Chinese Communist Party’s recommendations on the long-term plan for the economy through 2035 emphasized again to ‘steadily advance digital currency research and development.’ Meanwhile, the country is externally seeking a seat at the global digital-currency table. Chinese President Xi has stressed at the G20 summit on November 21, the need for China to get involved in the development of global standards and rules related to digital currencies.

According to Xinhua, the state media, China’s DCEP will adopt the principle of ‘controllable anonymity’. That means when trading with DCEP, both parties can be anonymous to protect the public’s privacy, but when it comes to combating corruption, money laundering, tax evasion, and terrorist financing, the state banks can still track the trading information.

 

 

 Internationally, the DCEP may help China to transfer digital money across borders independently from dollar-based international payment system like SWIFT. With the US readier than ever to close the liquidity taps on specific countries or institutions or people, China appears to be building its own private trading channels with countries like Russia.

 The Chinese government is yet to confirm a proposed timeline for the roll-out of the digital yuan. But it is certain that the DCEP will usher in a new financial era in China. Hi-tech businesses as well as foreign-invested retailers, financial institutions, and mobile app developers need to track how this will impact their scope of business, affect user behavior, and trigger any risk exposure

China's Digital Yuan: Development Status and Possible Impact

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