#38 - All about the China Digital Yuan project
China invented the paper currency. Now it is re-inventing digital currency. In this edition, I will focus exclusively on a project that had made Central Banks (equivalent to India’s RBI) all around the world to sit and take notice.
Chinese Digital Currency
China has started issuing on a trial basis, a block chain based digital version of its yuan to around 750,000 people who are selected via a lottery system. This currency can be used to pay in stores and online payments.
What is the problem with the other crypto currencies such as Bitcoin, Ethereum?
There are many reasons why Central Banks don’t want to consider the likes of Bitcoin, Ethereum, etc as a legal tender.
First, Central Banks across the globe do not have direct control over such crypto-currencies.
The prices of these cryptocurrencies are so volatile that they inhibit the ability of central bank to keep the exchange rate stable.
Forget the unbanked. These currencies are beyond the reach of even the common man and are accessible only to the privileged few.
So, Central banks around the world do not view crypto currencies such as Bitcoin, Ethereum as fiat currencies to be used in everyday transactions. But due to the emerging interest in crypto currencies, many Central banks are exploring the options of Central Bank Digital Currencies (CBDCs).
And, China just took a giant leap forward.
What is China doing?
China introduced what is officially called as Digital Currency Electronic Payment (DCEP), and will distribute $10 million Yuan (roughly around $1.5 million) to citizens selected via a lottery system.
The user has to download anyone of digital DCEP wallets introduced by 4 banks. The digital currency can be used in any one of the approved merchants and e-commerce sites such as JD.com (The lottery system was implemented by JD.com.)
Unlike the regular digital wallets, these currencies can be paid even without an internet connection, and there in lies the beauty of the system.
Why is the world so curious about this?
Almost 86% of the Central Bank around the world want to explore digital currency and China’s pilot will provide more clues on the way forward.
Also, China has joined the Project Inthanon-Lionrock initiative with Bank of Thailand to explore cross-border payments and thus providing a direct challenge to US dollar as a global currency.
From a local perspective, the digital yuan can also be groomed to be an alternative to Alipay & WeChat Pay. These 2 players dominate nearly 99% of the entire payment industry in China.
Which other countries have started issuing digital currencies?
Bahamas is the first country to launch a digital currency called Sandcoin. China is the second. India, South Africa, Pakistan and Thailand are some of the other countries that are planning to issue digital versions of their currencies soon, while other countries are exploring their options.
Hope this edition was informative. Till the next edition, Stay Healthy & Stay Safe
Best,
-Senthil