The Chinese government has not been particularly friendly to cryptocurrencies in recent years. Initially, the first coin offers (ICO) were banned in China in September 2017. After the crackdown on ICOs, exchange platforms that traded crypto currencies or provided facilitation services were also closed. This made it almost impossible for investors in China to buy Bitcoin.
However, this was not just a general ban. It was a preparation for things to come.
To understand the Chinese government’s tough stance on cryptocurrencies, we need to look at the bigger picture of China’s economy and financial market.
As central banks around the world grapple with the rise of Bitcoin and its inability to control it like fiat currencies, China is working to become the first country to introduce its own digital currency, also known as the DCEP (Digital Currency Electronic Payment) is known.
By banning other companies from issuing their own cryptocurrencies through the ICO ban and restricting bitcoin exchanges, the People’s Bank of China (PBOC) is ensuring the success of their own upcoming digital yan. Unlike cryptocurrencies like Bitcoin, trading the digital yuan does not protect any presumption of pseudonymity, and its value will be as stable as the physical currency issued by the government.
China on the way to a cashless society
China aims to be the first nation to issue a digital currency in order to internationalize the yuan and reduce its reliance on the global dollar payment system.
According to Reuters, an article was published in China finance, a magazine operated by the PBOC, stated that the right to issue and control digital currency would become a “new battleground” of competition between governments.
As part of the project, the PBOC defines the yuan as both a physical banknote and a digital currency. The idea is to build a new payment system network to break the dollar monopoly.
For this purpose, digital yuan tests are already in progress. Several tests were carried out in four cities, namely Suzhou, Shenzhen, Chengdu and Xionggan, as well as at the site of the 2022 Winter Olympics in Beijing.
How is the digital yuan tested?
By September 2020, the PBOC had issued digital currencies worth 10 million yuan ($ 1.5 million) and distributed them to 50,000 people in the Shenzhen area through a lottery.
The winners were rewarded with digital “red packages” worth approximately 200 yuan, which they could download and spend in 3,000 different stores. With almost 2 million participants in the competitions, the operation was rated as successful.
In early November, the governor of PBOC stated that four billion transactions with a volume of $ 299 million had been made using the digital yuan.
The DCEP payment network enables selected users to convert between cash and digital money, check their account balance, and make payments and transfers. Other experiments include government employees who receive transportation subsidies in the form of digital currency and McDonalds in Xiong’an who accept payments in digital yuan.
However, there is still no official announcement when the payment network will be made available to all Chinese citizens.
Does the public accept PBOC’s digital currency?
It is difficult to make a prediction. The results of the tests were quite positive in public. People signed up for the lottery in droves.
However, China is already becoming an increasingly cashless society. Even street vendors and market stalls in small towns prefer to use payment apps instead of cash.
Mobile wallets like Alipay and WeChat Pay already have large user bases in China, and people are unlikely to switch to the government app overnight. However, it has been reported that unlike these payment processors, there are no fees for the digital yuan.
Digital Yuan Vs. Bitcoin
While the digital yuan is supported by the PBOC, there are various ways it cannot technically be concluded with Bitcoin. Mainly it is not decentralized (and therefore not much different from the paper version of Yuan) and will not use a public, immutable blockchain ledger like Blockchain.
There are two main reasons why the PBOC is unwilling to run its digital currency on blockchain: First, experts have doubts that any network could handle the sheer volume of daily transactions of the Chinese population of 1.4 billion. Second, the decentralization and transparency of blockchain technology are two concepts that go against the Chinese government’s goal of striking a balance between anonymity and the need to fight financial crimes, according to central bank officials.
The digital yuan could allow the PBOC to more closely control bank lending and channel funding where appropriate, but a central bank-controlled digital yuan will never really compete with Bitcoin’s value propositions.
The economic impact of the upcoming DCEP is still unclear, and only the future will tell whether centralized digital currencies will help or hinder China’s economy. What is clear is that this is a new chapter in the ongoing battle between central bank-controlled fiat currencies and Bitcoin’s pseudonymous peer-to-peer offering.
This is a guest post by Judy Smith. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.