The words “digital currency” typically conjure up associations of financial gambles, high volatility, and questionable practicality, all characteristic features of existing cryptocurrencies such as Bitcoin. However, with a new generation of cashless payment methods emerging in China, this might soon be set to change. After more than five years in development and a number of successful tests in other cities, the digital yuan underwent a second trial in Shenzhen in the first half of January, raising hopes for a more extensive rollout in a couple of years’ time.
The underlying principle behind this project is similar to that used in the development of other types of cryptocurrencies, with several key differences that allow its use in day-to-day economic activities. Backed and issued by the People’s Bank of China (PBOC), unlike the completely decentralised Bitcoin, the digital yuan will retain the security and exchange rate stability of traditional currencies. This will give the same status as its paper analogue. Bitcoin, on the contrary, is not generally considered legal tender, and its use is prohibited or limited in many countries, including China. On a more contentious note, the anonymity usual for crypto transactions will not be possible with China’s official digital currency. This follows from the PBOC’s built-in ability to track the currency’s flows and to access a record of every payment made in it.
That said, the introduction of the digital yuan in China, and possibly beyond, looks like a promising next step in the transition to a fully cashless society. As things currently stand, the world’s biggest economy is already rapidly moving away from paper money: a very sizeable proportion of transactions in the country took place via online platforms last year. However, in parts of China, away from the technological hubs of its largest cities, banknotes, and coins remain the only viable means of payment. Despite all the progress made in this area, many people still face a range of different barriers preventing them from accessing the banking system, such as low income insufficient to meet the minimum balance requirements for a bank account. With the digital currency, however, the only thing someone needs to be able to use it is a smartphone with a digital wallet installed. This provides an excellent avenue for the integration of the financially excluded into the financial system in China which boasts one of the highest smartphone ownership rates in the world.
The yuan is not the only currency that might go digital in the near future: Sweden also started trialing its e-krona in 2020, the European Central Bank is eyeing the launch of a potential digital euro, and many other countries are considering similar projects. Still, as the pioneer of digital currencies, China will have an advantage over the rest. With time on its side, China might finally have a real opportunity to fulfill its government’s ambition of internationalising the yuan. Money talks, and if the convenience of the digital currency successfully lures international consumers and businesses into using it, Beijing could hope to be able to contest the global financial hegemony of Washington. This could offer China another route to growing its political influence in the world and tilting the balance of powers in its favour.
This innovation is, naturally, not without shortcomings. Like all innovations that came before and will come after it, it is prone to be weaponised if it falls into the wrong hands – and there is a major caveat making this easier. Chinese officials claim the lack of anonymity mentioned earlier is intended to help regulators better understand the structure of the economy and fine-tune their policy interventions. In practice, it seems unlikely that it will not be used for surveillance of Chinese citizens’ economic activity, reinforcing the already-formidable level of state control over every area of Chinese citizens’ lives. In this light, the digital yuan’s international use has even more worrying implications for privacy and democracy worldwide. Time will tell if the fears of technological breakthrough transforming into a vehicle of government control are entirely justified – and one can only hope that they are not – but until then this threat will continue to loom on the horizon.