China: the digital Yuan
China: the digital Yuan
Fintech

China: the digital Yuan

By George Michael Belardinelli - 12 Dec 2022

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China has always been a state that makes strictness and control the cornerstones of the exercise of power to the point of often being referred to as a regime rather than a republic, and now with the Digital Yuan it has raised the bar even higher. 

The Digital Yuan Project in China

The country aims to replace the paper Yuan with its digital counterpart but this move has turned the noses up at the Chinese and the international community who have raised concerns about the government’s excessive interference in citizens’ personal information. 

Beijing’s willingness to veer firmly toward this substitution process stems from the overwhelming power of the dollar and the opportunity that cryptocurrencies have demonstrated in the geopolitical arena. 

The war in Ukraine exposed the ineffectiveness of international sanctions with the mass adoption of digital currencies, which have been an effective means of circumventing the punishment inflicted on Russia by the rest of the world. 

Cryptocurrencies could enable transactions without the need for intermediaries or SWIFT. Indeed, trade between Russian ruble and Bitcoin has soared since Russia’s imposed cut-off from the payment system

China has banned cryptocurrencies and decentralized blockchain, deciding instead to develop the digital yuan, which is backed by its central bank. Stored in a digital wallet rather than a bank account, it aims to replace cash in circulation, but also provides the government with unprecedented levels of personal information.

The digital yuan will have a significant global impact, as it will create the largest database of centrally regulated financial transactions.

Analysts agree that the Chinese government’s approach to digital technologies is broad and intended to achieve its goal of becoming the world leader in the field, while the technology itself has increasingly become a key arena in its race against the United States.

Decentralized financial technology is not yet able to replicate the scale and efficiency of SWIFT.

In its efforts to reduce dependence on the US dollar-dominated financial system, China is now attempting to use its trading position and stimulate billing in the digital yuan.

If nations establish multiswap arrangements among themselves, transaction settlement by commercial banks and central banks will become unnecessary. It will not be necessary to go through the US dollar, American institutions or even the SWIFT network. However, this process is very slow and the yuan is not ready for total reform anytime soon.

Although the rate of increase in the percentage of yuan-denominated foreign exchange reserves seems large, it has little influence compared to the rate of growth of dollar-denominated reserves. The US dollar accounts for nearly 62% of total foreign exchange reserves, while the yuan accounts for only 2%.

Hong Kong, as a super-connector between mainland China and overseas markets, is set to play a crucial role in the use of e-CNY in global trade agreements with “managed anonymity” embedded in the virtual currency to allay concerns about tracking personal information. Zhang Tianyuan reports from Hong Kong.

Project mBridge: Connecting Economies Through CBDC (Central Bank Digital Currency) is co-led by four organizations, including the People’s Bank of China and the Hong Kong Monetary Authority. It is designed to enable the four jurisdictions – Mainland China, HKSAR, Thailand and the United Arab Emirates – to settle stable and efficient real-value payments with their conventional digital currencies in cross-border transactions.

The digital yuan, which was tested on the Project mBridge platform from 15 August to 23 September, was the most widely issued and actively used yuan in transactions worth more than HK$171 million ($21.9 million) and involving 160 payments that used CBDCs to settle cross-border trades, according to a Bank for International Settlements report.

Colin Pou Hak-wan, executive director of financial infrastructure at the HKMA-the de facto central bank of Hong Kong-said:

“The mBridge test platform, which aims to develop a system that can support the entire process of settling international trade in wholesale transactions, has validated the proposition that a central bank digital currency can substantially increase the speed of cross-border payments from multiple days to near real-time while reducing costs. The trial design eased the pains of settling cross-border payments, including high costs, slow speeds, and operational complexities. Ensures that policies, regulatory compliance, and mechanisms of privacy are adequately integrated.”

George Michael Belardinelli

A former corporate manager at Carifac Spa and later at Veneto Banca Scpa, blogger and Rhumière, over the years he has become passionate about philosophy and the opportunities that innovation and the media make available to us, in particular the metaverse and augmented reality

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