The digital yuan, also known as the e-CNY or the digital renminbi, is the first example of a working central bank digital currency (CBDC) issued by a major economy. The People’s Bank of China (PBOC) launched the currency on the 14th of August 2020 to function as a digital equivalent of the physical yuan (CNY). With aims to replace cash for everyday transactions, it is issued directly to individuals and cannot bear interest. It is pegged 1:1 to the physical yuan, facilitating near-instant domestic and international transactions. The ability to manage your digital yuan through dedicated apps allows features like daily spending limits to be applied to bank accounts. While there are many benefits to modernising the financial system through a digital currency like this, critics have warned of compromised privacy, as well as economic implications and geopolitical challenges. Through assessing the costs and benefits of the digital yuan, we can seek to gain further insight into this paradigm shift in the world of currency that will inevitably spread further throughout the globe in the coming years.
How does the Digital Yuan compare to other CBDC projects?
While at the time of writing, the digital yuan stands out with advanced development, many countries are exploring the possibilities offered by CBDCs. The e-CNY has undergone an extensive pilot program aimed at integrating it seamlessly into the Chinese economy. Already, it is being used widely for retail transactions, public transport and cross-border payments. For other major economies such as the US, EU and India, the development of CBDCs is very much still in the early stages. The digital euro and digital dollar are not yet being implemented at scale.
Retail vs Wholesale CBDCs
Certain differences in use cases between the digital yuan and other CBDCs include the categorisation of ‘retail’ and ‘wholesale’ CBDCs. The digital yuan is primarily designed as a retail CBDC, where it will replace cash for everyday transactions. Other countries are also exploring the idea of wholesale CBDCs, which are intended more for interbank settlements instead of direct consumer use. Examples of this include the Swedish e-krona and Project Jasper in Canada.
Centralisation vs Decentralisation
The digital yuan is fully centralised, operating on a ledger managed by the People’s Bank of China. Offline transactions are supported, as well as varying degrees of anonymity (depending on the size of the transaction). Alternatively, certain countries are experimenting with a more decentralised system using blockchain technology, or a combination of centralised and decentralised operation. For example, the European Central Bank has put an emphasis on privacy being a key design principle for the digital euro.
Cross-Border Payments
China’s digital yuan is already at an advanced stage when it comes to international payments, utilising Project mBridge. Championed by the BRICS+ coalition, the Project mBridge platform aims to reduce reliance on the US dollar by facilitating cross border payments and forex transactions using CBDCs. For other CBDC projects, cross border payments are still under exploration. The Bank of International Settlements (BIS) is collaborating on a multi-CBDC platform like mBridge, but it very much in the early stages compared to China.
Benefits of the Digital Yuan
For everyday transactions, the digital yuan offers many benefits over traditional banking, including:
Speed & Convenience
With the use of advanced encryption technologies, transactions are instant and secure whilst remaining robust against fraud and counterfeiting. Both online and offline payments are supported, thanks to NFC technology. The system is also easily integrated into existing mobile payment platforms.
Cost Efficiency
Without third-party payment providers, the digital yuan is able to eliminate transaction fees for merchants. Costs are lowered for businesses through this peer-to-peer system.
Financial Inclusion
Access to digital finance services are provided to those in underserved areas, like rural communities and others without bank accounts. Marginalised groups like the elderly are supported through simplified payment processes thanks to features like facial recognition.
Security & Transparency
Every transaction is recorded, improving traceability and reducing fraud risk, money laundering or other financial crimes. The ability to control anonymity allows users to enhance privacy for smaller transactions, while larger once remain traceable for regulatory purposes.
Increased Trust
The combination of government backing and enhanced security hopes to foster confidence in the digitisation of finance. A broader adoption in e-commerce and other sectors is to be expected in the future.
Potential risks of the digital yuan
Despite the numerous benefits listed above, critics have highlighted some potential risks from the project.
Privacy & Surveillance Concerns
The centralised nature of the currency gives the Chinese government access to monitor all transactions. The potential for misuse of this surveillance has grave implications for control over individuals and businesses. Censorship or punitive actions can easily be levied upon unfavoured individuals through their access to finance.
Cybersecurity risk
Simply by nature of operating digitally, the e-CNY is vulnerable to cyberattacks. Any vulnerabilities in the system could be exploited by cybercriminals for theft or other illegal activities.
Traditional Banking Disruption
A reduced reliance on the traditional banking sector may lead to the loss of jobs, and an overall shift in power dynamics. Whether this is an obvious downside or not is up for debate, but the increasing use of e-CNY wallets will lead to reduced demand for traditional banking services. Significant moves away from bank accounts into e-CNY wallets may lead to economic instability, through straining the banking system.
Financial Exclusion Potential
While the previous section explored how the e-CNY could improve financial inclusion, it can equally exclude those without access to technology. The digital divide may widen, furthering existing inequality.
Geopolitical Risk
The potential for bypassing US financial systems allows sanctions to be evaded, and the undermining of the dollar’s dominance in global trade. Consequently, economic tensions could be heightened, through the disruption of existing international financial systems.
Conclusion
The launch of the digital yuan represents a significant milestone in the world of currency, with many changes and improvements made upon the traditional system by way of speed, security and the elimination of fees. However, concerns have been raised over privacy, cybersecurity and economic disruption. As the first functioning CBDC project, it will serve as a model for other nations. As digital currencies gain traction worldwide, the lessons learned from the digital yuan will be crucial for shaping the future of currency, in striking the balance between digital conveniences and individual freedom.
As always, for currency news and insight into the world of currency, make sure to stay up to date with our Expert Analysis, as well as our daily Market Commentary.
Caleb Hinton
Caleb is a writer specialising in financial copy. He has a background in copywriting, banking, digital wallets, and SEO – and enjoys writing in his spare time too, as well as language learning, chess and investing.
