Digital Yuan Challenges the Power of the United States

Yuan digitale: cosa è e come funziona
8 min read

Digital Yuan: what is it and how does it work the first crypto currency of the state

It may seem strange that a country like China, which has always taken an extremely tough approach to the regulation of cryptos, can today be the first country in the world to launch its digital currency.

However, this is precisely what is happening in these months and, as proof of this, some sources have reported that the Chinese government, together with the central bank and the other national banks, would have given way to the general tests of the launch of the digital currency. 

The tests inaugurated by the China Construction Bank focused on the use of a coin purse designed specifically for the digital currency being launched.

It appears that banks are testing the wallet as a means to facilitate large-scale money transfers along with daily payments, using the digital currency issued by the Chinese central bank.

The digital yuan should work like this: consumers and businesses will download a digital wallet to their cell phone and fill it with money from their account at a commercial bank. So, they will use the digital currency as cash to make and receive payments directly from anyone with a digital wallet.

Why does China want to have its own digital currency?

As we have seen, the digital Yuan, or CEP (Digital Currency Electronic Payment), will be the first digital currency in the world issued by a central bank and managed by a state.

China’s objective is to use the Yuhan to carry out normal banking activities such as payments, deposits and withdrawals, with the aim of replacing bills and coins in circulation.

But why does China want to have its own digital currency?

If we go back in time, we will remember that in 2017 the Chinese government had banned the issuance of virtual currencies. So, the launch of a state-owned digital currency, announced by Xi Jinping on October 25, 2019, represents a clear change of position that follows the steps of the Chinese central bank that had already announced the implementation of a new digital currency that would coexist with its currency, the Renminbi, in order to combat money laundering.

Thus, the digital currency, on which the Chinese government has been working since 2014, will become in the first place an instrument of political and social control in the hands of the Chinese government.

Moreover, with this strategic decision, China aims to use its virtual currency to increase its geopolitical influence to fight the international hegemony of the dollar.

According to the Central Bank of China, in the short term the digital currency will not be issued in large quantities to the public.

The central bank, which will be the only issuer of the digitalized Yuan, will in a first phase offer the digital money to commercial banks and other operators and later the public will be able to transfer the money to their bank accounts to the digital version of the Yuan and deposit it in electronic purses.

What are the differences between the digital yuan and Bitcoin?

The Chinese government has never supported and still does not support the anonymity of cryptos.

This means that the digital yuan will not be able to offer many of the same anonymity and privacy features that Bitcoin and other altcoins currently possess.

Despite this, the Chinese central bank has promised to protect the privacy of users and has stated that the main intention of DCEP is to replace some of the Chinese monetary base and cash in circulation with the new digital currency.

In addition to the privacy factor, the digital Yuan has other important differences from Bitcoin and other existing crypto currencies.

Unlike crypto-currencies, digital currencies issued by central banks (CBDC) have their real-world equivalent, or are backed by physical money that is subject to each country’s regulations.

Owning a digital Yuan, therefore, is like having a paper Yuan, but in the virtual world, it can be bought anywhere in the world and its value will be as stable as the physical Yuan, which will remain in circulation.

The main difference with other types of digital currencies is that it would be issued by the Federal Reserve (equivalent to the central bank of the United States) and not, for example, by platforms that exchange crypto-currencies.

A central bank currency has a trusted issuer with a clear link to its legal currency and has a stable form of value.

When will China’s sovereign digital currency be launched?

Although there is not yet a timetable for the launch of the digital Yuan, as we have already mentioned, tests have already been carried out in a group of cities with some electronic portfolios and online applications. This sudden rush to begin the testing phase has probably been accentuated by the Covid-19 pandemic but also by China’s desire to manage technological change and impose its sovereignty.

Some reports claim that the Chinese government has clear plans to test its digital offering during the Beijing 2022 Winter Olympics. These are, however, statements that do not yet have a solid foundation and we will have to wait a little longer for news.

The project of a Chinese digital currency is a challenge to the power of the dollar

Yuan digitale sfida il potere del dollaro

As already mentioned, the digital yuan project constitutes for China a challenge to the power of the dollar and a threat to the economic sovereignty of the United States.

In the last month, several reports have announced how the latest offer from the People’s Bank of China could potentially signal the end of the current dominance of the US dollar market, as well as disrupt the global payments market, especially those characterized by a certain slowness, compared to the almost instantaneous transactions of crypto-currencies.

If the United States does not follow in China’s footsteps, they could be left behind, and this explains why, while China develops a digital version of its currency, the United States is exploring the path for the issuance of a digital dollar by the Federal Reserve.

Other countries such as Canada, Japan, United Kingdom, Sweden, Switzerland and the European Central Bank analyze the advantages and risks of creating a digital currency, regulated by governments and guaranteed by the currencies of each country.

At the last Davos Forum, held in January in Switzerland, the creation of a digital currency was one of the main topics, especially because China confirmed that the design of its digital yuan had been completed.

Nobody wants to be excluded from the race, not even the United States, which does not want to give space to China and put at risk the historical supremacy that the dollar has had.