Numerous countries are currently exploring the digital currency world, but China is years ahead of everyone. China has been working on its own digital currency since 2014, known as the digital Yuan.
China’s current problem: it has the highest population and second-largest economy but its currency, the Yuan, is barely used outside the country. What do we mean by this? “The Dollar” (USD) is used in most global businesses and sits at the top of the currency hierarchy. USD is the global reserve currency, with around 60% of foreign exchange reserves being held in USD. China is wanting to change that. How will they change that? They’re hoping through the digital Yuan.
There is a very strong possibility that the digital Yuan could replace paper money and coins.
Why would China want the Yuan to be used in other countries?
Firstly, because it rivals the U.S. who is currently king of the currency. The power that the U.S. is given by having the most highly regarded currency is immense. If the U.S. was to hypothetically sanction (remember when we spoke about that?) China (it has previously) and freeze financial assets, those sanctions can potentially freeze China and its currency out of the global financial system.
China is also the world’s biggest trading nation, but its currency is hardly being used outside the country (because the U.S. has a monopoly over that). China wants its Yuan to be used more, giving China further power, and become a stronger rival to the U.S. The more respected the Yuan becomes, the more people will want it. With that, comes power.
Okay sure, but how will making the Yuan digital help China’s ambitions?
The digitisation of the Yuan isn’t necessarily a direct challenge to USD, but rather has a future that the USD doesn’t have right now. The government can get the digital Yuan into the hands of citizens unbelievably quickly.
The digital Yuan can also be used to track transactions and economic behaviours and block transactions too.
How does it exist?
Chinese users are provided with a digital wallet that lives in the form of an app. Within the wallet, there are pictures of the Yuan and it works very similar to how Apple Pay functions with ‘pay with your phone’. The currency exists in the form of code. More on that below.
It’s a very difficult concept to wrap our heads around because something like this hasn’t really existed before. It’s different from Apple Pay in the sense that it’s actual money, like cash notes and coins. Apple Pay is linked to a bank account, whereas the digital Yuan is actual money, stored in a ‘digital wallet’. So think real-life money and wallet, but on your phone.
And to avoid inflation, every time a digital Yuan is created, a physical Yuan is removed from the system. A digital Yuan is worth the exact same as a physical Yuan.
Is it like Bitcoin?
Yes and no.
Yes: because the currency will exist in the form of code, the same as Bitcoin.
No: because Bitcoin is a decentralised currency (we spoke about that a couple of weeks ago), it is not regulated by one authority (like a bank or government).
Comparatively, the digital Yuan is centralised. It is controlled by the state and a Central Bank Digital Currency (CBDC) and is backed by an equivalent monetary reserve. In China’s case, it’s backed by its currency the Yuan. But digital currencies aren’t necessarily confined to just being backed by currency and can be backed in the form of gold or oil too.