The drive to introduce the digital Yuan comes with the next natural step in innovation – tapping new technologies to revolutionize existing financial processes and services. Digital currency will improve payment efficiency and reduce costs in China’s economy.
Especially cross-border transactions. Examine the impact of digital Yuan on Chinese Wechat pay.
Industry insiders see a shift towards cashless payments and internet finance as a significant trend backed by Beijing’s efforts to develop big data predictive analytics and artificial intelligence to monitor customer spending patterns.
But, of course, the most critical implication of a CBDC is that it could facilitate enhanced financial stability by effectively addressing the key risks associated with a fiat currency.
For instance, payments are made in the digital yuan via mobile devices and cloud networks, eliminating third-party intermediaries.
Such innovation would also give authorities more direct control of asset quality for more excellent stability and to push regulation development forward. The new digital currency is backed by China’s foreign reserves and issued by its central bank, which is indistinguishable from hard cash from the user’s perspective.
Mobile payment providers like Alibaba Mobile E-Wallet can operate effectively as retail banks on an upgraded infrastructure.
It would improve efficiency in the financial system, raise transparency, and lower the costs of processing transactions. However, the People’s Bank of China will have to overcome several challenges if the digital yuan takes off.
The PBOC must ensure that users can create no counterfeits and that transactions are traceable and verifiable on the public ledger with cryptographic algorithms. Let’s discuss how the digital yuan will change the future of payment modes.
Why did the PBOC introduce e-CNY?
The central bank, however, faces several challenges in making e-CNY more popular and widely accepted. The first challenge is the risk of unstable valuation. The PBOC will have to ensure that e-CNY cannot be used as a channel for money laundering or capital flight.
The developers will thus have to adopt a legal framework for the digital currency and will also have to ensure adequate tracking and identification of its users.
In addition, it is difficult for China to understand and show transparent data on e-CNY as China has started this journey later than other countries. As a result, the first big step for China to introduce a digital currency is to develop systems that can handle it.
These systems will have to be able to keep track of all transactions made with e-CNY and report data for regulators.
All these technological challenges aside, e-CNY will also benefit individuals in China. All of its digitalized facilities, with better security and traceability and easy access through mobile devices.
The PBOC will be able to monitor better and manage the system and initiate e-commerce, investment, and payment services. It will improve efficiency in the financial system and raise transparency.
Why is China concerned about capital flight?
The Chinese government is trying to stop capital outflows by tightening domestic banking and finance control. However, with a centrally planned economic policy framework, the central bank has yet to be able to balance economic growth and stability in recent years.
Therefore, the Chinese government wants to introduce a digital yuan to help ensure financial stability without weakening growth.
The PBOC announced at the 4th Plenary Session of the Central Committee in 2014 that an electronic currency is necessary and will be issued by the central bank.
In addition, an e-CNY would help reduce financial risks within the system by improving its efficiency and transparency.
Why is it called CBDC?
Unlike national or regional currencies, central banks issue digital money rather than a national currency. The PBOC wants to introduce e-CNY because it can help improve efficiency in China’s economy, increase productivity, and promote innovation in online business models.
The central bank believes that e-CNY will be used primarily for online transactions and shopping.
With an e-CNY, Chinese consumers can make real-time payments via their mobile devices and cloud networks. As a result, it can reduce the costs of processing transactions and improve accounting practices in China’s financial system.
The depositary receipts of the banking industry are unstable and do not provide adequate returns to depositors.
It is especially problematic in cross-border transactions. Therefore, the central bank needs to develop a digital currency that the country’s foreign reserves will back for a stable value of the digitized funds.
Digital Yuan’s aim is financial stability
The central bank has also stated that the e-CNY will be used as a wealth management tool for commercial banks to settle cross-border payments. The use of an e-CNY would be limited to this purpose and not available for consumers.
The introduction of the e-CNY is currently serving the role of a financial stability mechanism in China’s economy.
However, this is just the beginning – the central bank will eventually introduce other services and products based on digital currency to improve transparency, efficiency, and productivity in China’s financial system.