At any given time, there are always major blockchain and cryptocurrency projects in the works. Since cryptocurrency first saw a surge in the early 2010s, the industry has been rapidly growing into the billion-dollar sector we know today. One notable difference between now and when the industry first started is that the major projects in the works are not only those in the private sector. After years of pushback, governments around the world are finally embracing cryptocurrency projects and few have been more surprising or shrouded in mystery as the digital yuan.
Background of the Digital Yuan and Cryptocurrency in China
One of the major reasons why the digital yuan is so fascinating is that it marks a sharp change in China’s attitude towards cryptocurrency. In 2018, Chinese officials confirmed that a ban had been put in place regarding the use of digital currencies in the country. This was preceded by a ban of cryptocurrency trading sites in the country and all sites that promoted Initial Coin Offerings (ICOs). In order to get around this, Chinese citizens began making use of Virtual Private Networks in order to deal with cryptocurrencies.
Despite the ban in cryptocurrency use, crypto mining (the process that produces cryptocurrency) was prevalent in the country, though the government began cracking down on these activities in late 2019. The rationale given for this was particularly the stealing of energy in order to facilitate these activities. In a series of crackdown efforts across China, thousands of mining equipment was confiscated. With these actions taken by the Chinese government, it could have been assumed that cryptocurrency and blockchain would have no place in China. However, the emergence of the digital yuan has changed this perception entirely.
The Turning Point
In 2019, Facebook announced its upcoming Libra token, which was to be marketed to and utilized by its billions of users following its launch. Upon its announcement, it was arguably the most ambitious cryptocurrency project in the world and was set to having lasting effects beyond private use. Following the release of the whitepaper, the lobbying team for the Libra token tried extensively to gain regulatory approval around the world prior to the token’s launch. Across the board, they were met with criticism, with one of the most consistent ones being that the token would threaten the economic sovereignty of the nations it would be used in.
While the Libra project hit a number of roadblocks, it did have a significant effect on how governments approached cryptocurrency. In the past, cryptocurrency was ignored by many financial regulators, who either gave inadequate regulation for the industry or were sluggish to adopt it. Facebook’s proposed token showed that cryptocurrency could feasibly be used on a global scale. Also, should countries not act fast, private organizations could take the lead in the development of digital tokens.
In the months following the formal announcement of Libra, several countries announced the development of national tokens. This included the digital euro that is being tested in France and the digital yuan, which is believed to be China’s response to Libra.
While no official word was given about the digital yuan, rumors circulated that the People’s Bank of China had a token in the works. It was believed that the token was an effort on China’s part to ensure that cryptocurrency in China was state-issued and free of any outside influence. This might explain their initial hostility to cryptocurrency in the past. The same year, China’s President publicly advocated for more blockchain innovation and development in the country, which indicated a softening of China’s stance to the technology.
Testing Efforts Thus Far
Following months of token development, news coming out of China revealed that the digital yuan was to be piloted in four Chinese cities. These cities were to be Shenzhen, Chengdu, Suzhou, and Xiongan. A number of global corporations such as Starbucks would also be involved in the piloting of the token. According to an official from the People’s Bank of China, there was the goal of having the token ready for widespread use by the 2022 Winter Olympics.
Besides the ongoing pilot program in these cities, there is also the use of the token in the city of Suzhou. As part of testing efforts, 50% of local workers’ transport subsidies in the city are being paid in the digital yuan. Various institutions in the country have been instructed to conduct this testing in conjunction with one of four selected banks in the area. These banks are the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, and the China Construction Bank.
Naturally, comparisons have been drawn to existing tokens such as bitcoin but these have been debunked swiftly.
Chinese officials have already assured the public that the token will not be speculative or cause inflation but will be a digital version of their existing currency.
“The currency is not for speculation. It is different to bitcoin or stable tokens, which can be used for speculation or require the support of a basket of currencies,” said The People’s Bank of China’s (PBoC) deputy director Mu Changchun.
Future Plans and Implications of the Digital Yuan
Though no official release date for the digital yuan has been given, its effects are already apparent. First, the fact that a world power such as China is taking the development of a digital token this seriously sends a message to the rest of the world. Ripple CEO Brad Garlinghouse recently called out US regulators online for not being proactive enough about digital Dollar developments and warned that the US will fall behind China if care is not taken.
There is also the very real possibility of a digital currency war, a simulation of which was hosted by Harvard University’s Kennedy School. In the simulation, North Korea has been able to avoid US sanctions through the use of the digital yuan and the dollar’s dominance is threatened as a result.
It is inevitable that the creation and use of digital currencies around the world will have an effect on not just the global economy but international relations as well.