2 China’s Digital Yuan: ruffling a lot of feathers?

CHINA’S DIGITAL YUAN: RUFFLING A LOT OF FEATHERS?

By: Hitesh Jajoo (K J Somaiya Institute of Management)

China is in the process of launching the most revolutionary financial project in the world. The Chinese economy has already adopted cashless payment quite smoothly, and this would be a step to speed up even more it’s turning its physical points and banknotes digital, unlike most cryptocurrency‘s like bitcoins, which work outside the control of a countries central authority. The digital one will be the world's first digital currency that is state owned and issued by the central bank. It can be used anywhere as it would be a total substitute for cash the only difference being that it is on one smartphone.In the smartphone the digital one would be stored in a digital wallet.

It will not require a data connection for transactions to take place. Digital one is based on a technology called NFC (Near Field Communication) which allows to carry offline payments unlike Alipay and WeChat. You can make payment even when you are on a flight or climbing a mountain or in a forest where the Internet is bleak. It also has zero transaction fees for the merchant, whereas Alipay and WeChat charge 0.6% of every transaction.

WHY IS IT BEING INTRODUCED?

As cited by Fan Yifei, Deputy governor of People’s Bank of China, it saves the cost incurred on printing and straw and storing notes and coins. Cash and coins can also be counterfeited and can be used for illicit purposes, and the identity of the user remains anonymous.

Digital Yuanis a step where the government could find the anonymous user of the illicit activities when the need arises by checking every single transfer, whereas to some extent it remains anonymous too.

This would mean that it is anonymous horizontally but not vertically, meaning people wouldn’t know the details when they sent the money to another person, but the central bank of China knows it all.

This would eradicate counterfeiting and money laundering and clearly get a picture of who is spending what?. It could be a threat to foreign companies as China's central bank would then have all the details when they transact. It increases the government control over the currency. There are currently two major players in China in digital payment: Alipay And WeChat,, both privately owned therefore the introduction of digital Yuan is to encourage competition in the payment space and lower systematic risk. This new system will also bring in more efficiency.

Also, another big advantage is for the visitors in China. Travelers in China cannot use WeChat or Alipay unless they have a Chinese bank account or Chinese registered credit card, but there is no need for both of them with digital Yuan. It is also beneficial for people in remote areas in China, Eg- Qinghai or Tibet,, where people are under bank.

HOW WILL DIGITAL YUAN RUN?

Digital Yuan will be distributed with a two tier system, where the PBOC will distribute the digital Yuan directly to commercial banks. The commercial bank will then transfer the currency to the customers. This could include services to allow customers to exchange their coins in cash for digital Yuan.

The most common form of mobile payment in China depends on so-calle Quick Response (QR) codes. Users can use this barcode in the Alipay or WeChat App in a store, and the shop owner will scan it. Alipay on WeChat pay could have a section of that app separated for the digital Yuan. Apart from this, smart phone makers could also create a separate digital Yuan wallet feature in the devices. It is said that government employees will get half of the travel allowance as digital Yuan.

IS CHINA BECOMING FULLY CASHLESS?

The trial for digital Yuan has been taking place in several cities in China in the form of lotteries that dispense red envelopes. Last year in October, Shehzhen distributed around 1.5 million digital Yuan to locals. In Suzhou, $3,000,000 was handed out. For 2021’s Chinese new year holidays Beijing gave out around 1.5 million digital Yuan in red envelopes to 50,000 residents. Presently, there are limitations to the use in the travel phases, including deadlines on spending and a limited selection of participating merchants.

Also, American giants like McDonald’s, Starbucks and Subway have become the first vendors to tender digital Yuan. It is also believed that digital Yuan will be piloted in the Winter Olympics in