Since 2010, more than 80 countries took the first steps towards the development of a digital currency regulated by national banks. While many western digital currencies are still in the phase of research and development, China has released a pilot program for their digital currency involving more than ten million Chinese citizens. In April and May 2020, the pilot program for the e-CNY currency (better known internationally as Digital Yuan or Digital Renminbi) was debuted in four zones – Shenzhen, Suzhou, Chengdu and Xiongan. Earlier this year, the testing was expanded to six other regions, as the objective is to launch this system nationwide before the Olympic Winter Games of 2022 in Beijing.
As the Digital Yuan starts to gather the attention of international markets and specialists, one essential question arises: what exactly is the Digital Yuan, is it a cryptocurrency or a digital currency?
In 2014, the People’s Bank of China (the Chinese central bank) announced that they were researching and developing a “Digital Currency/Electronic Payment” system. It was said that this system would reduce operating costs, increase efficiency and enable a wide range of new applications in China. After the launch of the pilot program, we were able to acknowledge the major features of this currency:
- It is not meant to replace the existing physical currency – Chinese Renminbi will stay as China’s official currency; the Digital Yuan will be existing alongside it as a digital counterpart. Since the value of the Digital Yuan is indexed 1:1 to the value of the Chinese Renminbi, it will be similar to a stablecoin.
- The “controlled anonymity” allows partially anonymous payments, as the People’s Bank of China has the possibility to identify the parties involved in a specific transaction by accessing the “central ledger” that records the transactions. Preventing money-laundering and terrorism-financing are considered to be two of the main reasons that fuelled the development of this currency.
- The value and emission of this currency is controlled by the People’s Bank of China. It is the Chinese central bank that will regulate monetary policies involving the Digital Yuan, while removing banks as an intermediary for economical transactions.
With these key aspects in mind, where does the Digital Yuan stands?
Digital currencies can simply be described as forms of currency that are only available through electronic means. Since these currencies don’t have physical properties, they are stored on an “electronic/digital wallet” and from there they are electronically transferred to other digital wallets. Similar to physical currencies, digital currencies can be used as a payment in transactions involving goods or services (it is not restricted to digital content or digital services). Unlike physical currencies, digital currencies require that the parties involved in the transaction operate in the same network.
Digital currencies offer numerous advantages: they promote fast and efficient transactions, transactional costs are reduced or non-existent, all the transactions established are recorded (which increases transparency and certainty), and it facilitates international commerce by making it easier to do business with costumers from all around the world.
Overall, digital currencies offer the tools to facilitate commerce, promoting and maturing the digital economy and the digital transformation.
Cryptocurrencies are a subset of digital currencies that have very specific characteristics. In 2009, Satoshi Nakamoto (pseudonym) created Bitcoin, the first decentralized and peer-to-peer cryptocurrency, and it quickly gained notoriety, transforming it into the most popular and important cryptocurrency.
The main characteristics of cryptocurrencies are the following:
– Irreversibility and immutability – cryptocurrencies use blockchain technology to register all the transactions within the network. This system operates by the use of a digital ledger technology: a digital ledger stores the information of every transaction in a “block”. Each time a new transaction occurs, a new block is added, forming a “chain” of blocks that contain transaction information. This system can only add new information to the chain in order to make it secure and fool-proof, forbidding any entity from deleting or changing information on the previous “blocks”.
– Decentralization – cryptocurrencies allow for direct peer-to-peer transactions without the need for an intermediary. The distributed ledger technology is used to oversee the security and validity of the operation, while the participants confirm the transactions without the intervention of a central entity.
– Anonymity – the holders of a cryptocurrency receive and send currency through a “crypto address” that has barely any personal information attached. Every information and transaction are completely anonymous, but, if the crypto address is ever linked to the users’ information, all the transaction from that crypto address will no longer be untraceable or anonymous. Although this system is anonymous by design, there is a chance for the anonymity to be broken if the crypto address is linked to the real-world identity of the holder.
The Digital Yuan is a currency where the intermediary plays a major role. The People’s Bank of China will take the place that was previously held by the commercial banks in a much smaller scale, while keeping the role of regulating monetary policies. This bank will also have access to the ledger system that records the data, enabling Chinese authorities to extract information about any specific transaction and participants involved. Both these characteristics violate two of the principles of cryptocurrencies: anonymity and decentralization. Though on the surface the technology underlying the Digital Yuan may sound similar to Bitcoin or other popular cryptocurrencies, the reality is that the only similarity that exists is the promotion of peer-to-peer payment. In fact, if you hold a banknote worth 100 Yuan, the only relevant difference between that banknote and your digital wallet containing 100 Digital Yuan will be the lack of the physical element. As such, despite being based on the same blockchain technology used for cryptocurrency, Digital Yuan is best described as being a digital currency.
 “A stablecoin is a new class of cryptocurrencies that attempts to offer price stability and are backed by a reserve asset. Stablecoins attempt to offer the best of both worlds—the instant processing and security or privacy of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencies.”