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China's digital yuan nearing completion

The forbidden city in the heart of Beijing. Image by Mal B via flickr.com. License: Creative Commons

According to the Central Bank of China, the design of the digital blockchain-based yuan has already been completed. There is initial information on how the digital currency will be introduced – and guesses as to what the Chinese government expects from it.

The Chinese People's Bank (PBoC) recently announced, according to media reports, that work on the design of China's digital currency has ended. The following steps are now to follow “the principles of stability, security and control”. However, there is not yet an exact date when the digital yuan should become public.

According to other reports, the PBoC is planning to test the digital currency, abbreviated as DCEP, in the Shenzhen Special Economic Zone in small-scale experiments. This would be the first “legitimate digital currency” authorized by a central bank. The aim of the DCEP is to replace the money supply M0 – the reserve money or the cash in circulation. It will be linked 1: 1 to China's yuan. To do this, the PBoC plans to have the digital currency “controlled anonymity,” whatever that means. With DCEP, transactions are also to be processed offline using mobile phones. However, no specific technical details are known.

In the first phase, Chinese commercial banks should have access to DCEP, followed by large companies such as Alibaba or Tencent. China is thus far ahead of other countries, including the EU and the United States. There are always plans for a digital euro in the EU – for example from France or Germany – but one is still a long way off from a resolute, united approach as in China. However, there are also voices in China that strike more cautious and skeptical notes. Huang Zhen, an economist at the University of Beijing, says that there are still several – especially legal – obstacles to the national digital currency.

China should first develop the regulatory capacity to curb the digital currency to prevent the problems of early online finance from recurring. Many products have proven to be fraudulent and have pulled trillions of yuan from small investors. Currently, blockchain technology in China is often used to circumvent regulatory requirements. This could possibly be one of the reasons why China apparently is currently tightening its strict policy towards crypto exchanges and enforcing the strict regulation of the industry.

One of the goals of the PBoC with the digital yuan is to internationalize the Remnimbi – colloquially known as the yuan – since the digital currency can be used across borders without the intermediation of banks.

The Epoch Times – a magazine published by China, among other things to combat “misinformation” from the West – explains that China is “forced to go all out with the digital yuan”. The reason is that the volume of trade that takes place in Remnimbi has halved since 2015. Since 2012 China has been planning to raise the yuan to a global reserve currency. After early successes, the proportion of export transactions settled in yuan from 12, 5 to 27, 3 percent has increased, the rate has since dropped back to 12, 5 percent back.

Several economic research institutes warn that monetary conditions in China are causing new instabilities. While the government managed to boost the economy through massive infrastructure spending, the growth rate dropped to its lowest level in 30 while the level of private debt of worrying proportions. The digital yuan is now a major project for China to achieve the goal of making the yuan a real world currency.