Digital Assets: A World-beating Digital Yuan Taking Shape?

December 26, 2019 | Digital Assets, News
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China’s head of digital currency shares thoughts on a digital yuan.

According to Mu Changchun, head of the People’s Bank of China’s digital currency research institute, China is developing “a digital form of the yuan.”

Mu is also the Chinese central bank’s official in charge of the country’s new sovereign digital currency.

“The currency is not for speculation. It is different to bitcoin or stable tokens, which can be used for speculation or require the support of a basket of currencies,” Mu said, according to the South China Morning Post.

Digital yuan secretive, but making headway

It appears therefore that the Chinese central bank digital currency (CBDC) will just a digital version of its paper currency. The digital yuan will not have any speculative characteristics. These cause enormous volatility in cryptocurrencies such as bitcoin.

It will not also be collateral-backed by a fiat currency, a feature of “stablecoins,” such as the proposed Libra digital currency from Facebook.

The Chinese government’s abhorrence for speculation is well-known. Its crackdown on trading of bitcoins and digital tokens in November caused a slide in the price of bitcoin.

Meanwhile, Mu said that the central bank had completed top-level design, formulation, functional research, and testing of the digital yuan. But pilot projects need to test the digital currency.

China maintains a shroud of secrecy on its plans for a CBDC. However, we can piece together the progress from news stories.

A report earlier this month from Caijing Magazine said a pilot project of the digital yuan was imminent. It would involve the so-called Chinese “big four” state-owned commercial banks. These are the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China and the China Construction Bank. Also playing a role in the pilot are the top three Chinese telecoms. Reportedly, the PBoC would conduct the pilot program in the cities of Suzhou and Shenzhen.

ECB’s Proof-of-concept of a CBDC

Earlier this month, the ECB said the  European System of Central Banks (ESCB), had established a proof of concept (PoC) for anonymity in digital cash.

The PoC “demonstrates that it is possible to construct a simplified CBDC payment system that allows users some degree of privacy for lower-value transactions while still ensuring that higher-value transactions are subject to mandatory AML/CFT checks,” according to the ESCB report.

Further, the system revolves around intermediaries (Tier2) that will interact between the users and the central bank (Tier1). They have access to central bank accounts and can draw on balances to issue CBDC to the users.

Interestingly, in August, CNBC said China’s central bank would launch its digital token through a two-tier system, under which both the PBOC and commercial banks are legitimate issuers.

Related Story:  Inevitable That Central Banks Will Start Issuing Digital Currency: Fed’s Harker                                                 

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