BY DR SOHA MAAD
China launched its official digital currency. This article covers the launch event and overviews the various features of the launched digital currency including the goals, objectives, technology, trading, and mobile wallet app. Following this overview, the article reflects on China digital currency strategy, and its world impact. The article concludes with lessons drawn for Arab banks in digital currency innovation, control, sovereignty, and technology leadership.
Launch of the digital yuan
On Thursday the 13th of January 2022, Forbes Financial News announced the launch of China official cryptocurrency, the digital yuan. The news spread World Banks and Governments fears.
China is taking an unprecedented step towards cryptocurrencies and blockchain technology and is launching the digital yuan. World Banks and Governments are fearing the rising power of China following this step.
WHAT IS DIGITAL YUAN?
Digital Yuan, referred to as Digital renminbi (in Chinese language 数字人民币), or digital RMB, or e- Chinese yuan (e-CNY), or Digital Currency Electronic Payment (DCEP), is a central bank digital currency issued by China’s central bank, the People’s Bank of China PBOC. It is the first digital currency to be issued by a major economy.
The digital yuan is legal tender and has equivalent value with other forms of renminbi, also known as the Chinese yuan (CNY), such as bills and coins.
The digital yuan is designed to move instantaneously in both domestic and international transactions. It aims to be cheaper and faster than existing financial transactions. The technology enables transactions to take place between two offline devices.
The digital yuan is seen by some commentators as a form of Chinese government surveillance and control over users and their financial transactions.
Digital yuan technology
According to Forbes news, China is supporting its own Digital Currency Electronic Payment (DCEP) system, completely different from crypto. The DCEP is a digital form of China’s fiat money, subject to the same People’s Bank of China PBOC (PBOC) issuance and design regulations that govern physical currency. The goal of the DCEP is to provide high transparency into transactions for the government, in other words, to let Chinese regulators know everything about people who are making purchases and sales. The currency goal is exactly opposite to the goal of Bitcoin in term of control and supervision.
The DCEP is centralized and, since it is just a digital form of the Renminbi, it is stable and not, like crypto currencies, a speculative asset. The DCEP is designed to increase the government’s grip.
China developed its own blockchain because of its worry that traditional blockchain is a decentralized system enabling illegal views and payments. China authorities are supporting the development of a centralized, government-controlled version of the blockchain for China. The blockchain-based service network (BSN), launched in 2019, differs from the traditional blockchain in that it is permissioned and transparent to government authorities. It enables the government to reverse transactions. Ultimately, China hopes that BSN will replace SWIFT as a more secure version way to make international payments.
A blockchain is a distributed database that is shared among the nodes of a computer network. As a database, a blockchain stores information electronically in digital format. Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin, for maintaining a secure and decentralized record of transactions. The innovation with a blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party.
One key difference between a typical database and a blockchain is how the data is structured. A blockchain collects information together in groups, known as blocks, that hold sets of information. Blocks have certain storage capacities and, when filled, are closed and linked to the previously filled block, forming a chain of data known as the blockchain. All new information that follows that freshly added block is compiled into a newly formed block that will then also be added to the chain once filled.
A database usually structures its data into tables, whereas a blockchain, like its name implies, structures its data into chunks (blocks) that are strung together. This data structure inherently makes an irreversible time line of data when implemented in a decentralized nature. Blockchain is a type of shared database that differs from a typical database in the way that it stores information; blockchains store data in blocks that are then linked together via cryptography.
Different types of information can be stored on a blockchain, but the most common use so far has been as a ledger for transactions. The goal of blockchain is to allow digital information to be recorded and distributed, but not edited. This is why blockchains are also known as a distributed ledger technology (DLT).
TRADING DIGITAL YUAN
The Chinese government has informed that the company YuanPay Group will be in charge of the purchase and marketing of the digital yuan.
The sales of China’s digital coin officially started and currently these coins can be bought only from YuanPay Group at the price listed on their official website. Australia is one of the first countries where sales began. Chinese Finance Minister Liu Kun announced that the starting price of the coin will be only US$0,01. However, according to China Debt Management Office DMO Financial Group forecasts, in the next six months the price can easily increase up to 1,000%, with a chance of surpassing Bitcoin in terms of price and capitalization in 10 years. In Australia YuanPay Group has started a marketing campaign.
Steps to buy Chinese digital yuan are simple including filling out all personal details and purchase details and executing the order.
Initially, the digital yuan will not change significantly how money circulates through China’s financial system. Under the central bank’s direction, the six biggest commercial banks, all government-owned, will distribute digital yuan to smaller banks and to app providers Alipay and WeChat, which are expected to manage sender-recipient interactions.
Unlike electronic transactions, the digital yuan is designed to remove a way banks and financial apps profit off fees and brief built-in delays in such handoffs. The only necessary middleman is the central bank. Because it is state-backed, the digital yuan reduce risks to the financial system posed by China’s dominant payment platforms that are private companies.
For Beijing’s Winter Olympics in February, authorities are expected to give visiting athletes digital yuan to spend while they are in the spotlight.
Digital Yuan Mobile Wallet APP
On THE 4th of January 2022, Thomson Reuters Trust Principles announced that China central bank launched digital yuan wallet apps for Android and iOS.
The e-CNY app, developed by the People’s Bank of China’s (PBOC) digital currency research institute, was available for download on Chinese Android and Apple app stores in Shanghai.
China Central Bank announced that China will continue to advance the development of its central bank digital currency and improve its design and usage, including increasing its interoperability with existing payment tools. read more
The wallet app for the digital yuan is a push to expand usage to more people.
Now everyone can download the app, highlighting how China is trying to get more people to use the digital currency.
In China, an enormous share of digital payments is already being handled by private-sector mobile wallets like Alipay and WeChat Pay, whose level of control is already a concern for Beijing. the e-CNY app will face competition from China’s two dominant digital payment apps Ant Group’s Alipay and Tencent’s WeChat.
DIGITAL YUAN GOAL
In designing and promoting sovereign virtual money, China’s government has three major goals, apart from being at the forefront of deploying a digital currency.
- to gain greater insight into how money is flowing in the country and to improve monetary policy and also to prevent illicit activities, including money laundering.
- to regain control over payments that are increasingly mediated by private firms such as Ant Group’s Alipay and Tencent’s WeChat Pay.
- to eventually boost the yuan’s international standing.
The digital yuan wallet could compete with the payment systems already being provided by China’s tech giants. The digital yuan does not have many advantages over the existing payment tools, but may do have in the future.
The digital yuan incorporates a key function that could make it more attractive, especially among rural users. People can transact with it even if they’re not connected to the internet, simply by tapping two digital-yuan-enabled phones together.
China Digital Currency Strategy
Forbes experts see that digital yuan offers better data for the PBOC (China’s central bank) and other government bodies. The more the digital currency is used, the more the government has instant awareness of purchases and transfers, even knowing the geographic location of activity. A digital yuan also means greater consumer efficiencies and analytics and greater ability to monitor. The Chinese government believes in control, so this should not be a surprise. A digital yuan can be used to steer people away from other digital currencies and bitcoin variants. This control could be equally used to counter money laundering and other illegal activities. It could disintermediate other payment mechanisms. The introduction of a digital yuan will bring benefits to Chinese consumers and society, and facilitate government data collection and monitoring.
The digital yuan is trackable, adding another tool to China’s heavy state surveillance. The government deploys hundreds of millions of facial-recognition cameras to monitor its population, sometimes using them to levy fines. While China has not published final legislation for the program, the central bank may initially impose limits on how much digital yuan individuals can keep on their person, as a way to control how it circulates and provide users a dose of security and privacy.
China’s central bank will not use the new technology as a way to get more money into circulation, since every yuan issued digitally will essentially cancel one yuan circulating in physical form.
In issuing the digital yuan China proved that it is vigilant to threats and combatted the fears that a cryptocurrency could undermine government power if people began using it. China may be considered as a digital currency pioneer.
Reuters news announced that China’s central bank is cracking down on cryptocurrency trading, banning overseas exchanges from providing services to mainland investors.
In September 2021, China’s central bank announced a ban on all cryptocurrency payments and services, escalating its ongoing clampdown on bitcoin and other digital coins to roll out the digital yuan. Chinese regulators strictly prohibits exchanging cryptocurrency for legal tender, providing information or pricing services, and trading .
The statement, signed by multiple authorities including the People’s Bank of China, the Cyberspace Administration of China and the Supreme People’s Court said virtual currencies had disrupted the economic and financial order and bred money laundering, illegal fundraising and fraud. Virtual currencies do not have the same legal status as legal tender, and may not be circulated in markets as currency.
The move to ban all virtual currencies except central bank digital currency will strengthen the digital yuan. China ordered five state-run banks including Industrial and Commercial Bank of China, Agricultural Bank of China, as well as mobile payments giant Alipay, to cut off cryptocurrency transactions. It also imposed a broad ban on virtual- currency mining driving many miners overseas and slashing the country’s share of digital coin creation, once above 80%.
China authorities announced even tougher mining restrictions, barring new operations and accelerating exits from existing projects. Supplying electricity to miners is prohibited, and such projects cannot receive financial and fiscal support.
World impact and reaction
The Wall Street Journal sees that Chinese government is minting its cash digitally, in a re-imagination of money that could shake a pillar of American power. China is turning legal tender itself into computer code. China’s version of the digital currency is controlled and issued by its central bank. It is expected to give China’s government vast new tools to monitor both its economy and its people. By design, the digital yuan will negate bitcoin’s major draws of anonymity for the user.
Beijing is also positioning the digital yuan for international use and designing it to lead the global financial system, where the United States U.S. dollar has been king since World War II. China is embracing digitization in many forms, including money, in a bid to gain more centralized control while getting a head start on technologies of the future.
Digitization of the yuan can provide options for people in poor countries to transfer money internationally. This may threaten the dollar over the long term according to International Monetary Fund IMF experts.
The U.S., as the issuer of dollars used in major cross-border currency movements gives Washington the ability to freeze individuals and institutions out of the global financial system by barring banks from doing transactions with them, a practice known as dollar weaponization. Examples are American sanctions on North Korea and Iran for nuclear programs.
The digital yuan may allow exchange of money without U.S. knowledge. Exchanges do not need to use SWIFT, the messaging network that is used in money transfers between commercial banks and that can be monitored by the U.S. government.
The chance to weaken the power of American sanctions is central to Beijing’s marketing of the digital yuan and to its efforts to internationalize the yuan more generally. China central bank officials foresee that the digital yuan will protect China’s monetary sovereignty and offsetting global use of the dollar.
Biden administration sees the digital yuan as more threatening than the war with China. The Chinese have created a problem for United States by taking away their sanctions leverage.
Beijing has joined an initiative to develop protocols for the cross-border use of digital currencies, working with the Bank for International Settlements and the central banks of Hong Kong, Thailand and the United Arab Emirates.
Digital yuan will be rollout during Beijing Winter Olympics. The Games will feature ATM machines that can convert foreign currencies, including U.S. dollars. The digital yuan will be carried in a digital yuan wallet card. But the road to internationalization is not easy. China’s tight control on the exchange rate has already hindered the physical yuan’s wider use, and that policy will continue to put some off of adopting the digital version. Unlike truly anonymous cryptocurrencies, China’s central bank says the digital yuan will come with controllable anonymity, as users can get the digital wallet only by registering with their mobile number. Since people in China need to register their numbers with real identities, that promise may not carry much weight.
CHINA LEADERSHIP IN DIGITAL CURRENCY
According to Forbes, Wall Street Journal, Thomson Reuters, and CNBC, the digital yuan has become a hot topic as data nationalism and fights over technology standards reign around the world. Chinese companies are fierce about collecting the vast realms of data generated by the largest cashless population in the world. A digital yuan helps make China even more competitive, and gives it the opportunity, to make granular and aggregated decisions economically. The digital yuan also is part of China’s long-desired goal to internationalize the RMB across different countries.
China’s Cross-Border Interbank Payment System, an attempt to mount an alternative to US-dominated SWIFT, will only be strengthened by the lower transaction fees and settlement times promised by a digital-first DCEP.
As China integrates more closely with developing trade partners, it will attempt to impose new technological standards, including ones for digital money, upon the world in order to overcome the economic rules of the U.S. driven global order. The digital yuan may become more attractive than just a digital version of the RMB and help more quickly accelerate the trend of elevating China’s currency into a premier reserve currency. With the drive towards increasing international acceptance of Chinese currency, as well as the ability to set standards for how rich financial data is collected and used, the digital yuan is a major China’s attempt to lead the global financial order.
Lessons for Arab Banks and Authorities
Many lessons for Arab banks can be drawn from China pioneer launch of digital yuan. The most important ones are:
- Innovation in digital currency and digital payment systems development.
- Control of digital currency
- Gaining sovereignty of digital currency
- Leadership of digital currency technology
- Use of wealth of data generated by digital currency trade
- Defining goals, strategies, and policies for a national digital currency
- Global positioning of the digital currency
- Developing mobile apps for trading digital currency
- Worldwide trade and acceptance of digital currency
- Marketing use of digital currency in important world event. China choose the Winter Beijing Olympics. Saudi Arabia and UAE have many events to promote their national digital currencies
- Global financial leadership
- Modernization of financial system to surpass bitcoin and underlying technologies
- Addressing global need and the need of the wider world population
- Enhancing international money transfer and competing with SWIFT and U.S. dollar
- Developing a working model for managing digital cash
- Developing advanced technology standards for digital currencies