Today, more than 80 governments around the world – representing 90% of global GDP – are exploring or experimenting with central bank digital currencies (CBDCs). In July 2022, five countries launched their CBDCs. All are Caribbean island nations: Bahamas, Saint Kitts and Nevis, Antigua and Barbuda, Saint Lucia and Grenada. Of all the major economies, China has moved the most towards a full CBDC with its digital yuan, also known as e-RMB or Electronic Payment Digital Currency (DCEP). Here we explain what the digital yuan is and what are the similarities and differences between it and the original cryptocurrency, Bitcoin (BTC).
What is the digital yuan?
CBDCs are state-managed digital currencies. In the case of China, its CBDC would be a digital version of its currency, the Chinese renminbi (the e-RMB). CBDCs are similar to stablecoins, which are indexed at a 1:1 ratio with a specific fiat currency. So the digital yuan is nothing more than the digital equivalent of China's physical currency: you digitally hold the fiat currency in a mobile wallet instead of a physical bill in your pocket. Each physical note printed by the central bank has a unique identifier, and therefore each digital yuan token issued has the same. Unlike cryptocurrencies, CBDCs are not usually based on a decentralized blockchain, as the central bank would seek to maintain clear authority over ledgers. We will explain more about this in a moment.
Is the digital yuan already in use?
First proposed in 2017, the digital yuan has been in a pilot phase since April 2020. As of October 2020, the People's Bank of China (PBoC) has distributed millions of digital yuan to citizens as part of an effort to test the technology – and create some buzz around it. This is still ongoing in 2022. Chinese citizens can already spend the digital yuan at a growing number of stores across the country, including Walmart. In fact, according to a July 2022 PBoC progress report, the digital yuan has already been used in 70.75 million transactions, reaching a total value of 34.5 billion yuan ($5 billion) at the end of June. The next item on the agenda for the digital yuan is a massive launch during the Beijing Winter Olympics in February 2022. That launch will include overseas visitors. But Senator Cynthia Lummis (R-WY), a Bitcoin friend, and her colleagues, Senators Marsha Blackburn (R-TN) and Roger Wicker (R-MS), have asked the United States Olympic and Paralympic Committee to stop athletes of using the digital yuan, as it "can be used to watch over Chinese citizens and those visiting China on an unprecedented scale."
Why does China want a digital currency?
Fan Yifei, deputy governor of the Chinese central bank, explained in an April 2020 article published on Yicai Global, a state-sponsored news outlet, that physical money is expensive to print and maintain, easy to forge, and its anonymity means which can be used for unlawful purposes. The digital yuan, he said, would overcome these problems. There are reasons to believe that reducing the anonymity of money is the main driving force behind the project. After all, the Chinese Communist Party, which controls the government in an unchallenged regime, has built the world's largest surveillance state. Yao Qian, former director of the digital currency institute at the PBoC, said in May that it was not the bank's intention to observe all transactions in real time. But the Chinese government has deployed millions of face-recognition cameras across the country to track anything and everything, and even punish minor offenses like crossing the street without looking at traffic lights. A digital yuan could fit neatly into this surveillance infrastructure. Former US deputy national security adviser Matt Pottinger pointed out that the digital yuan could be used to retaliate against companies and individuals who criticize Beijing. "This currency can be turned off like a light switch," Pottinger told Bloomberg in April 2022, noting that the Chinese government could block transactions for a company's wallets and remove them from Yuan digital apps.
What are the differences between Bitcoin and the digital yuan?
China has repeatedly suggested incorporating many of the buzzwords associated with the blockchain into the digital yuan. But revealingly, decentralization is not one of the words on the list. Bitcoin and digital yuan make peer-to-peer payment easy. It's the only resemblance, really. Bitcoin is able to do this because it is built on a blockchain and eliminates the double spend problem, and the digital yuan can do this because it works more like direct money and less like bank-connected digital money transfers. It's a big deal because 84% of the Chinese population already uses a mobile wallet – by comparison, only 41% of Americans use apps like Apple Wallet. In China, WeChat Pay and Alipay represent about 90% of the country's $35 trillion mobile payment market, according to Bloomberg Intelligence. But these portfolios need to be linked to private financial intermediaries such as banks. The digital yuan changes that. Bitcoin is decentralized and without central authority. In contrast, the digital yuan is built on a structure called “one currency, two addresses, three centers”, referring to: The renminbi – the only currency!PBoC and Commercial Bank as two addresses – digital currency control is done by these two centralized entities… and the three newly established centers for monitoring and analyzing transactions: Identification Center, Registration Center, and Big Data Analysis Center.Bitcoin's public blockchain means transactions are traceable and pseudo-anonymous Digital transactions in yuan will be tracked by the government under a principle called “controllable anonymity”: the state can end users' anonymity if it wants to, which means, in effect, that anonymity doesn't actually exist. Bitcoin is widely used as a store of value and commercial asset. The digital yuan will be just an everyday currency. It will be tightly controlled by the government to ensure that its price reflects the national currency on a 1:1 basis, so that there is no arbitrage opportunity for traders or a reason for investors to hoard it.
What does the digital yuan mean to Bitcoin?
Bitcoin has never been adopted as a medium of exchange in China, where its trading has also been severely restricted since 2017. So there isn't much change on that front. But thanks to cheap electricity, China has historically housed the largest share of BTC miners globally – as high as 75.5% in September 2019. In May 2022, the Chinese government said it needed to crack down on mining and trade Bitcoin to “prevent and control financial risks”. This reasoning also fits neatly with the broader goals behind the digital yuan, of course. The global share of Chinese miners had already fallen to 46% in April 2022, signaling that the process was underway before the start of the government crackdown in earnest. With Chinese provinces like Yunnan, Anhui and Qinghai banning Bitcoin mining (presumably in an effort to reduce China's carbon emissions), by June 2022 almost all mining activities in the country went offline. The crackdown also prompted the Central Bank of China to issue a decree to payment platforms and banks to cease cryptocurrency activities, while institutions were instructed to stop maintaining cryptocurrencies and over-the-counter (OTC) platforms. But thanks to basic features like immutability and decentralization, Bitcoin is mostly resistant to censorship. While the recent Chinese crackdown has sent Bitcoin's hashrate plummeting (along with its price), the effects are likely temporary. Chinese miners are quickly moving to new places, while the BTC hashrate has slowly started to recover. But maybe it's not so much the competition at home that matters. China may also be trying to take on Bitcoin on another front – in a competition to beat the US dollar and become the next global reserve currency. China has denied such ambitions. But its July 2022 report showed that the PBoC will invest more in cross-border payment testing to promote the digital yuan on a global level. Meanwhile, Bitcoin may have a long way to go before it has a chance to challenge the dollar as the world's global reserve currency — but it's seeing increasing adoption. The small nation of El Salvador recently adopted the BTC as its legal currency, becoming the first country to do so. *Translated and edited by permission of Decrypt.co