Digital yuan gives China a new tool to strike back at critics

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China has recently released its own version of a digital currency known as the digital yuan that is controlled by its central bank. China is also positioning the digital yuan for international use.

What is the digital yuan?

• The digital yuan is effectively a way for the central bank to digitize banknotes and coins in circulation. The Chinese market is already advanced in cashless payments. The digital yuan would be a way to speed that process up.
• It will be legal tender in China and no interest will be paid on it.

How does digital yuan differ from bitcoin?

• Bitcoin is a so-called decentralized cryptocurrency, which means that it is not controlled by any central authority like a central bank, unlike the digital yuan which will be issued by the PBOC (People’s Bank of China).
• Bitcoin is built on a technology known as blockchain. It is not clear as yet what kind of technical make up the digital yuan would have.
• Unlike bitcoin, the yuan is not based on anonymity. Digital yuan would have “controllable anonymity.” This would involve those operating digital yuan wallets to disclose transactions to the PBOC as the sole third party.

Why is the digital yuan being introduced?

• Geopolitical significance: China’s development of a digital currency will make it harder for the U.S. to enforce sanctions. Digital yuan appears potentially more geopolitically significant as leverage over multinational companies and governments that want access to China’s large consumer base.
• Efficient payment system: The digital yuan would make the payment system more efficient and could help with financial stability through a system of “controllable anonymity.”
• Increase competition in the payment space: Another reason for introducing the digital yuan is to increase competition in the payments space and reduce systemic risk. China’s digital payments arena is dominated by Alipay, which is run by Alibaba affiliate. The existing system is owned by private companies and it creates systemic risks.

What are the possibilities of digital currency being introduced in India?

• While the RBI had earlier expressed reservations regarding cryptocurrencies, it has announced that it is working on its own digital currency. The RBI has intended that it will tap the benefits of blockchain technology for this project.
• As the existing laws in India are inadequate to deal with the subject, the government has formed an inter-ministerial panel to examine the issue.
• According to the United Nations expert on blockchain, consumers in India could gain if the country adopts central bank digital currencies as it will not only reduce security breaches but also eliminate the need for having a bank account.

Sources

https://www.cnbc.com/2021/03/05/chinas-digital-yuan-what-is-it-and-how-does-it-work.html

https://www.wsj.com/articles/china-creates-its-own-digital-currency-a-first-for-major-economy-11617634118

https://www.investopedia.com/terms/d/digital-currency.asp#:~:text=Digital%20currency%20is%20a%20form,electronic%20currency%2C%20or%20cyber%20cash.