China’s Digital Currency: All You Need to Know
Centuries in the past, when the dormant form of global currency was coins, China was the first country to formally induct paper currencies as the standard of transactions. The fiat currency induction led to a revolution in global economics by simplifying currency management and establishing a comprehensive standard in the way the global economy worked. Today, in the 21st century, the Chinese government has taken another leap to become the first nation to innovate the currency market by announcing the creation of a digital currency.
Even though strides have been made to shift towards virtual currency mediums with the induction of credit cards and other payment formats, China's decision to introduce an entirely virtual currency has been a major transition from the conventional management structures. The country's broader consumer public has already displayed a trend towards the adoption of digital payment mediums with the rapid spread of WeChat, QR code payments and other integrated management applications to simplify financial management.
Today, we will explore the each of its detailed aspects by exploring the dimensions and practical applications of the currency.
What is China’s Digital Currency Electronic Payment (DCEP)?
China’s Digital Currency Electronic Payment (DCEP) is the digital version of the country's existing Yuan currency. The currency is extensively backed by the currency reserve held in the National Bank of China and the development process of the currency has been ongoing for over five years, with active conversions of bank holdings being shifted to a digital yuan model in the country. The digital currency has been actively developed by the central Chinese Bank as a mechanism to manage the country's digital operations and provide citizens with a legal cryptocurrency to manage operations. The digital Yuan has emerged as a way for the country to tap into the unbanked population throughout the country to expand the national reach of the individuals into the broader mainstream economy. The country's central objectives have been to shift towards being a cashless economy due to the inherent benefits vested in the decision to shift away from cash banking options such as curbing illegal activities and fraud.
However, before delving into the areas that the currency will be actively used for, it is important to analyze how it works.
How will the Chinese Digital Yuan Work?
Throughout the Chinese economy, the utilization of the currency has been expanded into two primary areas to have a clear exploration. The primary element has been related to the broader distribution of the currency. This digital currency will be nationally distributed throughout society using a two-tier workability system. The distribution mechanism for the currency would be broadly based around the People's Bank of China (PBOC) distributing the digital currency to commercial banks throughout the country. The banks would further distribute the currency to users throughout the country. The eventual mechanism would be based around the exchanges of services and goods against the currency, with exchange mechanisms established to transform conventional currency with the digital alternative.
The country has been actively increasing the number of individuals who are receiving the amount from the commercial banks as a form of expanding the reach of the currency throughout the country. The country has also been actively experimenting with the induction of the currency throughout different national regions to explore the potential workability and reception of the currency. This currency has been actively distributed through the national application (e-CNY) with the collaborative involvement of the country's largest eCommerce players into the equation to allow customers to have a viable platform for transacting using the digital currency.
The dynamics of the application of the currency are exponentially expanding across different domains, with the specifics emerging on a gradual basis. The country's dominant purchasing form has been through the usage of QR codes with conventional retailers. Users have the ability to integrate the payment codes with e-CNY through their primarily purchasing and communication examples with merchant interactions.
The prospects of the commercial bank integration of the currency have also emerged forward, with local commercial banks indicating a broader wave of acceptances. Smartphone players in the local manufacturing industry have also indicated trends to integrate payment wallets in hardware devices to expand the potential applicability of the digital currency.
With the workability of the digital currency, it is important to evaluate the need that led to the creation of the currency and its broader widespread propagation.
Reasons for Introduction of Chinese Digital Currency
The rapid growth of the cryptocurrency landscape since the inception of bitcoin has been an educative phenomenon for governments and authorities around the globe. The increasing consumer shift towards the adoption of digital currencies and cryptocurrencies have led to governments considering the introduction of their own digital currencies.
Here are some of the biggest reasons why the Chinese Digital Yuan was introduced.
Improving Efficiency – Conventional paper-based currencies have been identified to be a key factor in rampant financial mismanagement and corruption throughout the world. The usage of conventional currencies does not leave any trackable layer of transaction management, which can lead to the potential of major financial mismanagement and misappropriation. The Chinese government identified the introduction of the currency as a way to curb potential mismanagement and improve transparency throughout transactions.
Curbing Illegal Cryptocurrencies – Most commonly used cryptocurrencies are highly encrypted and anonymous. The anonymity element of the transaction has led to the usage of conventional cryptocurrencies in widespread criminal applications throughout the world with the difficulties associated with identification and tracking. The digital currency creation would lead to the government providing a viable alternative to conventional anonymous cryptocurrencies that have been associated with illicit activity and financial mismanagement throughout the world.
Expanding Banking Coverage – To reduce the unbanked population within the country, it is essential to simplify the banking process by making it easier to access for the common individuals. Expanding the coverage of the financial network towards the unbanked population has always been a primary objective of the Chinese government, and the introduction of digital currency has emerged as an example of that policy by the government. The simplification of the transactions and the incentives tied into the shift to digital currency will serve as a major tool in increasing the pace of adoption and enhancing consumer trust.
With the wider expansion of the currency, there is a wide range of benefits that have been associated with the spread of digital currency in common day-to-day transactions.
Benefits of Adopting Digital Currency
The adoption of digital currency has explored a wider range of benefits for the consumer and the government. The integration of technology has already been a commonly explored phenomenon with the introduction of credit cards and other applications. Digital currency takes those advantages to the next level by tapping into the next generation of digital financial applications.
Improved Traceability and Accountability
The utilization of blockchain technology allows the digital Yuan to tap into the maintenance of a digital ledger that actively tabulates all the transactions being processed over the blockchain. The transaction record would allow the government to have a greater understanding of the monetary supply of the country to simplify financial operations for the local population without extensive involvement from private sectors. The primary aspect of adding accounting has also emerged as a result of a counter-push against the increasing spread of decentralized cryptocurrencies in the country, which serve as a medium to increase crime and decrease governmental control overspending.
Faster Transaction Management
Conventional transaction management mechanisms can be inefficient because of the exchange of cash procedures involved. Shifting towards digital currency management allows the reduction of the workforce involved in the handling of the cash applications and streamlines the usability by having autonomous digital management through integrated systems. The transaction management speed is also enhanced with the induction of digital transaction management in contrast to conventional cash-based transactions. The transaction speed of domestic digital transfers will also be accentuated through the integration of digital currency on the basis of innovative new technology.
Enhanced Fraud Protection
One of the biggest disadvantage of conventional digital payments is the potential for fraud and misuse. Global fraud complaints have been a major aspect of the downside currently present in digital transactions. The digital Yuan removes this possibility by having a nationalized management structure for the currency and the monitoring of the details to ensure that fraud is not a possibility. This shift helps the people have a safer digital usage experience by benefitting from governmental protections. Fraud protection has always been a key priority for the government, and the introduction of digital currency provides the government with a viable way to establish comprehensive fraud management throughout the country.
Increased Local Business Windfall
Amidst the current Covid 19 pandemic, conventional shopping mechanisms and social distancing requirements have exerted a major toll on revenue. The introduction of safe digital transaction mediums like QR codes involving the digital Yuan simplify the transactions and help local business improve their revenue by having simple transaction management from customers. The introduction emerges as a key step forward in enhancing the business recovery process.
With the culmination of the aforementioned benefits, digital currency seems to offer a viable upgrade from conventional currency forms. An insight into the future of the currency points towards a transformed financial management environment.
The Future of China's Digital Currency
With the extent of governmental influence in China, the propagation of the currency seems to be a major part of the future of the country. Governmental sources have also pointed towards the intention to shift to increased digitalization in the context of the existing policies. The incentives provided to digital transactions are reflective of the potential vested in the shift as well. The future of the currency seems to be the beginning of a broader trend that has the potential to become a catalytic force throughout the financial management of the country. The decision-making by the government can also prove to be a major cornerstone for other global economies to take similar steps to introduce digital currencies domestically.
Based on the successful pilot launches of the currency throughout the country with widespread traction in consumers and business, China's new digital currency has emerged as a key tool to transform domestic financial management. As China has developed a reputation for being a transformative force in global payments and technology, the latest step by the government to shift towards a digital currency emerges as another example of the Chinese government’s digital focus.
For consumers, the currency presents an opportunity to embrace a new era of digital finance with extensive incentives and assurances pertaining to financial security. Despite potential reluctance in shifting to a digital medium, the prospects offered by the currency are lucrative enough to consider a viable shift.