Over the last couple of months, the People’s Bank of China (PBoC) has been actively working on the development of the country’s central bank-backed digital currency (CBDC) – the Digital Yuan. Based on the large number of media reports on the matter, we can only assume that once released, China’s CBDC will be an instant success amongst the Chinese population, thus paving the way for future national digital currency experiments.
This article is meant to provide an overview of the most recent developments regarding the digital yuan.
The digital yuan is economically-designed to deter inflation
So far, the CBDC has been trialled in several Chinese cities, including Shenzhen, Chengdu, Xiong’An, and Suzhou. These tests were meant to determine the usability of the coin while ensuring that the traditional fiat issuance and circulation system remains unaffected. Thus, rumours indicate that commercial institutions that will use or distribute the CBDC will have to pay a 100% reserve to the central bank, as a means of preventing the over-sale of the token.
Soon enough, testing will commence for a mobile app meant to facilitate the storage and exchange of the digital yuan
The tests will be carried out in the same cities as highlighted above. According to a press statement issued by the PBoC, “the rumoured information about the DECP on the internet is part of the test in our research and development process and it does not mean the digital yuan has been launched officially.” A bigger test has been scheduled for the Beijing Winter Olympic Games in 2022, which means that the coin will not be publicly-available until then.
The CBDC will be based on a two-layer architecture, backed by a two-tier delivery system
In layman’s terms, this means that the coin remains usable despite potential connection problems with the online banking and payment systems. Thus, touch-based transfers can be made offline via two smartphones that are equipped with the DC/EP digital wallet.
The digital yuan will feature inherent stability, thanks to its credit-based backing
With this in mind, the philosophy behind the coin is to actually create a digital version of the renminbi (yuan). From a financial standpoint, the coin will be backed via the country’s credit, thus making sure that it keeps its value, and never fluctuates more than the RMB.
Based on everything that has been outlined so far, market analysis shows that the upcoming digital yuan is likely the most advanced CBDC project so far. While countries such as Venezuela have experimented with state-backed digital currencies, no other country is carrying out a development project of this magnitude.
Without a doubt, if successful, China’s CBDC will fully replace the nation’s standard banknotes.