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Why China created a digital currency

 

 

 

When money meant coins a thousand years ago, China invented paper cash. In a reimagining of money that could rock a pillar of American power, the Chinese government is already minting cash digitally.

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Cryptocurrencies like bitcoin have hinted at a possible digital future for money, despite the fact that they exist outside of the established global financial system and are not legal tender like government-issued cash.

The Chinese central bank, which will issue the new electronic money, is in charge of the country’s version of a digital currency. It is likely to provide China’s government with a slew of new tools for monitoring the country’s economy and people. By design, the digital yuan will eliminate one of bitcoin’s most appealing features: user anonymity.

Beijing is also preparing the digital yuan for worldwide usage and designing it to be untethered from the global financial system, which has ruled since World War II and is dominated by the US dollar. China is embracing digitization in a variety of ways, including money, in order to acquire greater centralised control while gaining a head start on future technologies that it sees as open to grabs.

 

Now you must be wondering why is China doing this?

The simple answer is that the digital yuan is intended to replace cash in circulation, such as coins and banknotes, rather than money held in bank accounts for long periods of time.

Commercial banks will be responsible for disseminating the digital currency to users, and in order to do so, they must deposit the equivalent amount of reserves with the PBOC as the digital yuan they distribute.

Unlike bitcoin and other cryptocurrencies, the digital yuan would not employ blockchain, a distributed ledger technology that allows transactions to be authenticated without the use of banks.

 

Since 2014, when bitcoin first gained popularity in China, the PBOC has been working on a digital yuan initiative.

 

What is the mechanism behind it?

Users download digital wallets in which they can deposit their funds and generate a QR code that can be read by payment terminals in stores, similar to China’s existing commercial digital payment methods like Alipay and We Chat Pay.

 

What kind of impact will it have?

The widespread usage of the digital yuan may provide Chinese policymakers with a better understanding of how money moves across the Chinese economy.

This would allow them to identify any unlawful cash movements and experiment with monetary policy actions targeted at specific economic classes, regions, or other people.

It would also allow them to have negative interest rates on cash in dire economic circumstances.

China has long desired to internationalise its currency, and the digital yuan may aid this effort in the future by making it easier to attract users in other nations to utilise the yuan.

Is there a possibility for the US digital currency as well?

Janet Yellen, the US Treasury Secretary, indicated that the Joe Biden administration supports research into the possibility of a digital currency, a change from her predecessor, Steven Mnuchin’s, lack of enthusiasm for the subject.

Yellen stated at a virtual conference hosted by the New York Fed that “it makes sense for central banks to be looking at” establishing sovereign digital currencies.

Many countries have experimented with digital currencies in recent months, according to statistics available from the Bank for International Settlements. Sweden, for example, has done real-world trials of a digital krona, while the Bahamas has made the Sand Dollar, a digital currency, available to all people.

 

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