China testing digital yuan in four cities

After the rumor mill went into overdrive last week, China has finally confirmed that it has begun testing its digital yuan. 

The People’s Bank of China (PBoC) said in an April 17 release that its prototype central bank digital currency (CBDC) is being put through its paces in Shenzhen, Chengdu, Suzhou, and Xiong’an, which lies about 60 miles from Beijing. It will also be tested at the 2022 Winter Olympics in Beijing. 

While recent reports have suggested the Chinese government wanted to have a functioning digital currency in place for the worldwide stage of the Games, the PBOC report referred to that venue as part of the same “internal closed pilot tests… to continuously optimize and improve functions” of the digital yuan as the other four cities.

No difference

A CBDC is a government-issued digital version of its fiat currency—essentially a cryptocurrency—that is issued and regulated by the country’s central bank.

“Simply put, the digital currency of the People’s Bank of China is the electronic version of the RMB” or yuan, according to an April 19 report [Chinese language] in the Beijing Chinese Communist Party-owned Beijing News. “[It] does not pay interest, and can be used in small, retail, and high-frequency business scenarios. There is no difference compared to paper money.”

However, both the PBOC and Beijing News stressed the pilot programs would not affect the banks that will distribute it for the PBoC, the circulation of the traditional yuan, or the “financial market and social economy beyond the testing environment.”

The Beijing News article pointed to the differences between a digital yuan and both the decentralized Bitcoin and Facebook’s Libra stablecoin project. It’s value would not be subject to wild market fluctuations like BTC, and unlike Libra, it will be backed by the credit of the state just like the physical yuan, the report added.

Six years in the making

The PBoC says it first began research on a digital yuan back in 2014, and it completed the basic design this January. China has been racing to become the first country to launch a CBDC and gain an early advantage in the marketplace.

Rivals such as the U.S. have been dragging their heels on issuing their own—much to the exasperation of some politicians—with Treasury Secretary Steven Mnuchin publicly stating that he believes one will not be needed until 2025 at the earliest.

Other countries, particularly in Europe and Asia—as well as the EU—are actively exploring the potential of CBDCs. The Banque de France has been particularly aggressive, calling for pilots of a CBDC for both retail and bank settlement purposes in the past year. 

Back in January, six central banks—including the Bank of England, Bank of Canada, Bank of Japan, and the European Central Bank—announced they were delving into “use cases; economic, functional and technical design choices, including cross-border interoperability; and the sharing of knowledge on emergency technologies.”

Still, that means Europe is at least several years behind China. 

Questions remain

Some experts have argued that central banks are wise to take their time before hurriedly launching a CBDC. Last October, a report warned they could bring serious financial risks—making bank runs faster, more severe, and harder to stop. That could potentially turn a calamity at one small bank into a systemic crisis for the whole economy.

There’s also the privacy risk. Mu Changchun, the head of the PBoC’s digital currency research institute, suggested that the central bank will enforce the particularly Orwellian idea of “controllable anonymity.” Whereas consumers can find greater privacy in paper coins and banknotes, especially when making small purchases, it’s possible the nature of their transactions could be more easily scrutinized with a CBDC.

Although Mu stressed that Beijing is “not seeking full control of the information of the general public” through its digital yuan, the notion of anonymity being switched on and off at will has raised eyebrows among some analysts. Reading between the lines, it could mean buying Winnie the Pooh books with digital yuan wouldn’t be the smartest move.