The Bank of China, one of the four major state-owned commercial banks in China, has announced that it will start to offer digital yuan services to its customers nationwide. The move is part of China’s efforts to promote the use of its central bank digital currency (CBDC), also known as the e-CNY or the digital renminbi.
What is the digital yuan?
The digital yuan is a digital version of China’s fiat currency, issued and controlled by the People’s Bank of China (PBOC), the country’s central bank. It aims to replace some of the cash and coins in circulation, as well as to compete with the dominant mobile payment platforms in China, such as Alipay and WeChat Pay.
The digital yuan is not a cryptocurrency, as it is not based on blockchain technology or decentralized. Instead, it uses a centralized system that allows the PBOC to track and monitor all transactions. The PBOC claims that the digital yuan will enhance the efficiency and security of payments, as well as support financial inclusion and innovation.
How does it work?
The digital yuan works through a two-tier system, where the PBOC issues the currency to authorized commercial banks, which then distribute it to their customers through digital wallets. Users can download the e-CNY wallet app from the app stores or scan a QR code to access it. They can then link their bank accounts or use cash to top up their wallets.
Users can make payments with the digital yuan by scanning QR codes, using near-field communication (NFC) technology, or even offline. The transactions are instant and do not require any fees. Users can also transfer money to each other by entering their phone numbers or wallet IDs.
The PBOC has said that the digital yuan will follow the principle of “controllable anonymity”, meaning that users’ identities will be protected for small-value transactions, but large amounts or suspicious activities will be traceable by the authorities.
What are the benefits and challenges?
The PBOC has been developing and testing the digital yuan since 2014, and has conducted several pilot programs in various cities, such as Shenzhen, Beijing, Shanghai, and Chengdu. The bank has also distributed millions of digital yuan to citizens through lotteries and red envelopes.
The PBOC has stated that the digital yuan will help reduce the costs and risks of cash management, improve the transmission of monetary policy, and support cross-border payments. The bank has also collaborated with other central banks and international organizations to explore the potential of CBDCs.
However, the digital yuan also faces some challenges, such as user acceptance, interoperability, privacy concerns, and regulatory issues. Some users may prefer to stick with their existing payment methods, which offer more features and incentives. Some merchants may not be ready or willing to accept the digital yuan, especially if they have to upgrade their equipment or systems. Some users may also worry about their data security and privacy, as the PBOC will have access to their transaction records. Moreover, some countries may view the digital yuan as a threat to their sovereignty or financial stability, and impose restrictions or sanctions on its use.
What are the next steps?
The Bank of China said that it will launch a series of promotional activities to encourage its customers to use the digital yuan, such as offering discounts, rewards, and lucky draws. The bank said that it will also expand its cooperation with other institutions and platforms to increase the availability and convenience of the digital yuan.
The PBOC has not announced a specific timeline for the official launch of the digital yuan, but some experts believe that it could happen after the 2022 Winter Olympics in Beijing, where the digital yuan will be used as a payment option for visitors and athletes. The PBOC has also said that it will continue to improve the design and functionality of the digital yuan, and explore more use cases and scenarios for it.
