What is the Digital Yuan?

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6 min read

In recent years, digital currencies have grown on a large scale and as always, China is not far behind. In this article we will talk about its official digital currency, the Digital Yuan.

The E-Yuan has been under development since 2014. Following its development, China began limiting the use of cryptocurrencies in the country, including Bitcoin. This caused cryptocurrencies to stop being used on more than 100 Chinese exchanges since 2017. All this backed by local regulations on fraud and money laundering.

The arrival of the Digital Yuan meant a technological breakthrough for its users, as it would guarantee fast and convenient payments through QR codes. However, the government would also benefit because they can monitor users and collect their data.

Why was the Digital Yuan created?

Throughout history, there have always been two countries fighting for the world economy, China and the United States. Virtual currencies started to take a big share in the world economy and because of that came the Digital Yuan.

One of the objectives of the Digital Yuan is to defeat the dollar in the struggle for the economy. This decision to develop the E-Yuan directly affects the United States, as it threatens its hegemony as a world power. However, the existence of this digital currency also affects the cryptocurrency market.

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How does the Digital Yuan work?

This currency was officially launched by the Central Bank of China. This ensures that the backing is China’s own money. In this way, its price stability is guaranteed, unlike most cryptocurrencies. The main objective of the E-Yuan is based on replacing part of the banknotes and coins in circulation. The Central Bank is in charge of issuing the new coins in circulation, therefore, it is responsible for the issuance of the currency. This currency has its equivalent in the real world, this thanks to its backing in physical money. In addition, it is regulated by the Asian giant.

It should be noted that the E-Yuan is a CBDC or Central Bank Digital Currency, so it does not have the anonymity offered by cryptocurrencies, it is not decentralized and it also stores the personal data of its users’ transactions.  Due to these notable differences with respect to cryptocurrencies, many users claim that the E-Yuan is a tool that allows the government to monitor its economy and the transactions made by the population.

According to the government, the Digital Yuan is merely a tool under development aimed at balancing the economy, improving it and making it smarter by collecting and applying real-time data.

This digital experiment appears to be not only intended for a internal economy, but is designed to expand worldwide as a method of payment. The Central Bank is in the process of developing to enable the Digital Yuan for cross-border payments.

It is known that China’s Ministry of Commerce estimates a trial period for the currency that could last until 2023, although the international press currently claims that the E-Yuan will be available to participants in the 2022 Winter Olympic Games to be held in Beijing, with the aim of extending it to the whole world.

With the enabling of the already developed Digital Yuan, commercial banks are required to convert part of their assets into this new digital currency and distribute them to the country’s enterprises and citizens.

According to local statements four of the country’s largest banks have started internal tests of a digital wallet. These state-owned banks are Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China and Bank of China.

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To summarize, among the characteristics for which the Digital Yuan stands out is that although it is a digital currency, it is centralized and anchored to the value of the Yuan. However, it helps the Chinese economy to participate in the global economy by boosting it.

Another important aspect, especially for traders, is that the E-Yuan does not depend on market speculation, as it is managed solely by the Central Bank of China.

Finally, the Digital Yuan does not use blockchain, instead it has a basic encryption that guarantees the security and transparency of transactions. It should be noted that this currency can be used without an internet connection.

Why is it a threat to the dollar?

 

Beijing’s main goal for this digital currency is to position it for international use and payments. This area has belonged to the US dollar for decades.

According to some news reports, the U.S. administration is constantly monitoring the currency’s development due to concerns that the E-Yuan could become an interesting offer for some countries that would abandon the dollar as a reserve currency of value.

The distribution of the currency and its possible uses in terms of avoiding U.S. sanctions are currently being studied. However, the country has tried to deny these claims on several occasions. China stated that for the time being the E-Yuan is only for domestic use, but it is not ruled out that in the future it will be used for cross-border payments.

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