The Digital Yuan: Is it Cryptocurrency?

The Digital Yuan: Is it Cryptocurrency?

Cryptocurrency and other forms of digital currencies rapidly continue gaining more public attention thanks to recent events. The advent of blockchain technology and propositions of a decentralized currency caught almost instant traction since the 2008 financial crisis. In late 2017, Bitcoin reached unprecedented values, giving rise to somewhat of a crypto “gold rush”. However, in 2021, concerns about the once promising currency system are running high. It’s volatility, lack of regulation, and lack of intrinsic value are often quoted as fundamental issues for its adoption as a global currency.

Due to these reasons, Central banks around the world – US, the UK, France, Canada, Sweden, Japan, Russia, Korea and Singapore as well as the European Central Bank – have begun to explore the probability of assuming Central Bank Digital Currencies (CDBCs) at the national level.

The People’s Bank of China (PBOC) have now begun the initial stages of testing the Digital Yuan or E-CNY. As China prepares to enter a new chapter of economic growth, the PBOC is building up an “open, inclusive, inter-operable, and innovative currency system” better suited for a digital economy.

The spread of Covid-19 demanded a greater use of digital products and services, even in developing and remote areas. Online financial services in particular have become an irreplaceable necessity.

Is E-CNY Fiat or Cryptocurrency?

No. The Digital Yuan is not a cryptocurrency. As the white paper released by the working group on E-CNY of the PBOC repeatedly emphasizes, the Digital Yuan is a digital version of the fiat currency issued by the PBOC.

The right to issue E-CNY will lie with the state, with the PBOC at the center of its operation. The Digital Yuan is a substitute for cash in circulation and will exist alongside physical RMB. The Digital Yuan is not yet set to replace physical RMB completely. As long as the demand for physical cash exists, the PBOC will continue supplying it, and will not “replace it via administrative order”.

Why switch to E-CNY?

The advantages of using digital currency over cash are many, but one reason in particular usually goes unnoticed. The cost of cash management is IMMENSE. Banknote design, coin production, minting, printing, transportation, deposit and withdrawal, identification, processing, reflow, destruction, counterfeit prevention are all high expenses on a country’s budget. The introduction of a CBDC cuts these cash management costs drastically. Losses incurred as a result of losses in physical currency will also be reduced substantially. The efficiency and convenience of the public’s daily payment needs will improve dramatically with the issuance of E-CNY.

A countrywide rollout of a central bank digital currency will certainly bring in a new era in how we carry out financial transactions. Money and its myriad forms have evolved through time and digital currency is definitely the next phase.