Digital currency

How the digital yuan will change the world of money forever

In China, it is already possible to buy or sell almost anything with the digital currency e-yuan. The digital yuan is traded over the Internet and can be stored on cell phones, for example. In China, the digital yuan is much more widespread than bitcoin or other digital money systems.

Beijing (China). Since the Chinese invented paper money over a millennium ago, innovation in payment systems has been slow. Now China is once again the driving force behind a new monetary system. While the Western world is still pondering whether to move to digital forms of currency, China has already begun paving the way for a digital Chinese yuan. This is increasing the pressure on Western central banks.

The People's Bank of China (PBOC) has provided hundreds of thousands of randomly selected compatriots with a small balance of e-yuan via app, which they can spend on a trial basis at what are now well over 10,000 acceptance points. Cryptocurrency acceptance zones are set up in Hong Kong and other free market areas. Today, the digital yuan can be purchased through Yuan Pay Group.

More government control through the digital yuan

Physical money is becoming less important in China as the growth of fintech-based payments continues. However, these fintech apps are leading to a loss of control and power in Beijing. The E-Yuan, created and distributed by the state, also represents an attempt to regain financial control and counteract the anonymity of cryptocurrency users - the latter of which is also desired in the United States and Europe.

How far will China go with the e-yuan?

Beijing has not yet decided how far it will go with digitizing its currency and assets. Bankers and analysts believe China's push is aimed at eventually digitizing the entire national currency. Digitizing the entire national currency promises even more control and should seem very tempting for an authoritarian-run state like China.

However, China has always planned for the long term. For example, an agreement with the Bank for International Settlements is exploring the use of the digital yuan in cross-border transactions. The big test will be the 2022 Winter Olympics in Beijing, where locals and tourists will be able to use the e-yuan on a trial basis.

The digital yuan is an attack on the U.S. dollar

The United States, with its dollar the world's dominant reserve currency, is critical of such plans. A recent report by Biden confidants expressed fears that China's long-term goal with the e-yuan is to weaken or even overthrow the world's dominant reserve currency.

The Chinese rebuttal promptly followed: "Our goal is not to replace the U.S. dollar or other international currencies." Rather, the intention was "to give the market freedom of choice and to facilitate international trade and investment."

The fact that Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen are themselves actively exploring the possibilities of a digital dollar, the statement comes as no surprise that experts do not share fears about the e-yuan.

Although global digitization should favor the use of the Chinese yuan in cross-border transactions, the deciding factor in its global acceptance is whether China will loosen its capital controls. A global reserve currency should be freely available to individuals and organizations around the world - only then can it be accepted by the world.

The US dollar is far superior to the yuan

In recent years, large amounts of capital have flowed into Chinese financial markets, increasing the volume of yuan traded globally. Nevertheless, foreign investors so far hold only about five percent of Chinese stocks and three percent of Chinese bonds. Compared to the dollar's share (62 percent) and the euro's share (30 percent), the yuan's share remains insignificant.

However, experts agree that Beijing's pioneering role should accelerate the development of state-generated digital currencies. These variants of digital currencies could reorder the fundamentals of finance and, in the long term, replace the monetary system as we know it today.