How far along is China into testing its digital currency?

Since launching the trial of its digital yuan program two years ago, China’s plan has so far become a cause of concern for many of the country’s critics highlighting how it could further fuel China's surveillance capabilities, although it has also encouraged other central banks to explore the potential of a centralized e-currency in the era of digitalization.

Digitalizing the yuan 

The digital yuan, also known as the e-CNY and officially called the Digital Currency Electronic Payment, is issued by the People’s Bank of China (PBoC) and has the same value as the yuan. It marks the first of its kind worldwide and is aimed at creating a new form of currency to meet consumers’ demand for cash for online transactions.

“The e-CNY system will bolster China's digital economy, enhance financial inclusion, and make the monetary and payment systems more efficient,” according to a white paper published by China’s central bank last year.

The PBOC started researching a digital currency as far back as 2014 and since the launch of the digital yuan app on app stores in China in January, the payment method has gained more popularity among Chinese consumers. China also accelerated the rollout of the digital yuan trials to more cities in time for the 2022 Olympic and Paralympic Winter Games earlier this year.

The e-CNY has since been used in various applications including in wholesale and retail, catering, tourism, and payment of administrative fees, expanding its use to offline transactions. Users can simply tap their phones on payment terminals at physical stores using QR codes or near field communication (NFC).

By the end of 2021, China’s digital yuan transactions reached almost 87.57 billion yuan ($13.17 billion).

AliPay, WeChat Pay integration

China’s central bank has also integrated the e-CNY on the two most dominant mobile payments platforms in China: Tencent Holdings' (HKG:0700) WeChat Pay and AliPay by Alibaba Group's (NNYSE:BABA) financial technology affiliate Ant Group. The platforms recently started accepting payments made via the e-yuan.

The move came at a time when Beijing imposed tougher regulations on the fintech sector in a bid to clamp down on monopolies and money laundering using mobile payments apps. 

Not a cryptocurrency

While China quietly explored building a blockchain platform to facilitate the deployment of blockchain technology for companies, the e-CNY is not part of the plan as the digital yuan is not a cryptocurrency.

Beijing has repeatedly warned against the potential financial security and social stability risks involved in cryptocurrencies like Bitcoin. It has gone as far as ordering the closure of companies that provide software services for cryptocurrency trading, asking AliPay and WeChat Pay to avoid providing services for virtual currency transactions, and cracking down on Bitcoin mining and trading-related activities.

Starting the digital currency trend

The rapid introduction and expansion of China’s digital yuan encouraged other central banks to explore the possibility of launching their own versions of the e-CNY. A survey conducted by the Bank for International Settlements in 2021 found that nine out of 10 of the 81 central banks worldwide are considering launching their own digital currencies.

Skeptical of e-CNY

Still, many financial watchers and governments remain skeptical of the digital yuan, citing fears that Beijing could use it as a tool for increased government surveillance. Critics argue that the Chinese Communist Party could use the e-CNY as a window into every payment transaction made in China because unlike cryptocurrencies that use blockchain technology to maintain the anonymity of transactions, China’s digital yuan relies on a centralized ledger that the central bank validates without the need for banks.

Critics have also raised concerns that the e-CNY could undermine the US dollar’s role as the global reserve currency, potentially destabilizing the financial dominance of the United States.

Whether China’s exact plans for the digital yuan goes far beyond offering a new payment system for residents, the launch of the e-CNY has allowed central banks to explore new ways to make payment systems more convenient for people in the digital era.