China’s CBDC is one of the most significant developments in fintech (financial technology). In addition, the People’s Bank of China (PBoC) has taken China’s financial system into unchartered territory, as it is the first government to authorize digital currency transactions within its borders. Chinese electronic money has been officially sanctioned! Learn why you should use digital yuan.
The PBoC has taken a technologically savvy approach to its digital trial currency and could be a massive success for the bank if it chooses to go ahead with this new form of money. The world has been watching the development of China’s CBDC intently, as China is already a significant player in the financial technology industry.
A country with a population of 140.21 crores, it operates one of the world’s leading mobile payment services, Alipay. Creating a national digital currency could increase financial inclusion and become the preferred payment method for hundreds of millions or even billions of people.
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The Central Bank Digital Currency (CBDC) Project
The PBoC expects its digital currency to be used for cross-border transactions and lower transaction costs for individuals and companies, just as credit cards have done in recent decades. China would go above and beyond its current payment networks by issuing a central bank digital currency.
The PBoC would oversee the use of the CBDC through a centralized authority. Some experts fear China’s national digital currency could fail because it over-centralizes decision-making, creating systemic risk within the financial system. This project aims to minimize transaction costs and increase efficiency in cross-border payments by introducing an open payment system based on blockchain technology on the Chinese mainland.
How Is Digital Yuan Different From Existing Cryptocurrencies?
China is attempting to bridge the gap between the digital world and the real world. Launching a national digital currency makes everyday transactions more accessible, giving individuals more leverage when making payments.
It’s being seen as an asset-backed national digital currency that will serve as an alternative way to hold assets, much like T-bills do now while meeting liquidity needs. However, it has all the convenience of cash and a store of value function like gold or other precious metals.
Undeniably the utter notion of this digital currency is heavily inspired by cryptocurrency and blockchain, but there are some drastic differences between these two forms of electronic payment. For example, Digital Yuan is devoid of mining, peer-to-peer networks, and anonymity features which are the major forces driving the use case of cryptocurrencies. The Chinese government has its vision of this virtual asset-backed currency which is more of a tokenized fiat currency rather than a peer-to-peer digital cash system.
Under this system, users can convert the yuan held in their current account into an equivalent amount of Digital Yuan assets on their mobile devices at any time and then make payments across the country.
Why Is China Bullish On Blockchain?
The People’s Bank of China (PBoC) has been very vocal about its support for distributed ledger technology and blockchain to migrate conventional paper-based financial transactions onto a new digital platform. The bank recognizes the importance of advancing financial technology to facilitate digitization and promote the smooth operation of markets in China.
Superiority in Technology over Other Countries
In 2017, it was reported by some sources that China’s digital currency industry had outpaced the rest of the world, with domestic technology companies leading their global counterparts in terms of patent applications.
Nowadays, few countries can rival China’s aggressive stance on blockchain technology. A prime example is Japan, which stands in second place with 25 blockchain-related patent applications against PBoC’s 68. In a more recent study by the Bank of International Settlements, it was revealed by the authorities that China was proactive in digital currency adoption and had progressed significantly in this area.
The country’s central bank has also set up a committee to include them on the Asian Infrastructure Investment Bank (AIIB) management committee, a global development bank based in Beijing.
China’s national digital currency is likely to have some drawbacks and downsides. Still, if it can genuinely realize its core goal of increasing financial inclusion at the cost of reducing transaction costs, it could become much more successful than other countries’ administrations.
Other Benefits Mainly Achieved By Centralized Currency System:
It provides an excellent environment for financial innovation and experimentation. Digital currency provides central banks key insights into money demand and supply in the country. It will lower the cost of transactions for domestic and foreign users.
All the advantages of using it: no third-party intermediaries, no risk of double spending and fraud, etc. It is a crucial move to help China become a cashless society and build an inclusive financial service system that covers both physical and virtual currencies. China has also been exploring blockchain technology in other areas, such as cross-border payments and governance, but its digital yuan has a lot riding on it.
