China is the most advanced country in the development of a central bank digital currency (CBDC). Now, the Chinese government has announced the success of the latest test with the digital yuan pilot, held in the city of Suzhou, near Shanghai. There, 181,000 consumers received about $ 8.50 in state cryptocurrency in a distribution campaign to spend in stores participating in a festival that took place in the first week of May.
The completion of this latest test is part of a larger program by the central bank of China, which has been testing its CBDC with about 500,000 consumers in 11 different regions of the country since April. Participants are given access to an application that creates an exclusive digital wallet of the digital yuan. Thus, they can make discounted purchases at thousands of establishments that are part of the project.
The Chinese state cryptocurrency is a digitized version of the physical yuan, hosted on a private blockchain network and functioning in a very similar way to most digital currencies. However, the Chinese government’s intention is for its CBDC to replace banknotes and coins, and not to become a speculative asset like bitcoin (BTC).
This latest round of testing is ten times the original one that occurred in the fall of 2020. China is also testing the digital yuan on the Hong Kong-Shenzhen border. There is also a platform under development to make the currency internationally viable in a joint effort with Thailand, the United Arab Emirates and the Bank for International Settlements (BIS).
China expected to become first country to have CBDC operating
With all these advances in recent months, China is on track to become the first country to put a fully functioning and fully functioning central bank cryptocurrency into circulation. At the moment, the digital yuan is already well consolidated, with a private blockchain network managed by the Chinese government. The most recent advance was the creation of digital wallets provided by the central bank. The transfer and payment functions are in the testing phase, but with no apparent problems.
No date has been announced, but a nationwide launch is expected to take place over the next 12 months, probably in staggered stages. As a comparison, the United States Federal Reserve (Fed) is still debating whether or not to start the development of a state-owned cryptocurrency. The European Union recently held public consultations on the matter, but no decision has yet been taken.
The Chinese CBDC is already well underway. Payments using it are fundamentally different from those on more common platforms, such as PayPal. These services can process transactions very quickly for customers, but there are many intermediaries in the way, such as credit cards and traditional banks.
The digital yuan circumvents the need for third parties. There is no service fee, unlike these payment alternatives and, in theory, the speed of payments can be even faster. The issuance of this CBDC is the same as the issuance of traditional money in circulation, which makes it equally secure.
Digital yuan still faces major challenges
However, a digital yuan raises deep questions about global financial stability. For critics of Chinese cryptocurrency, there are several dangers. The first is about international payments. Currently, most foreign exchange transactions use the dollar as an intermediary. This means that there is considerable demand for the American currency, which has advantages for the United States government.
Transactions using the digital yuan will not need the dollar, raising many doubts about the future of the international financial system and worrying the American government that its currency will lose its current monetary sovereignty. About 120 countries have China as their largest trading partner, and many of them question the dollar deals for adding additional exchange rates. China says it is not trying to replace the US currency with the digital yuan and that the “goal is to allow the market to choose” how to close international transactions.
However, the biggest challenge for the digital yuan is not bureaucratic, but advertising. Cryptocurrency membership is leaving much to be desired. The Chinese population is not showing the interest expected by the CBDC. In this way, the government of China needs to mobilize itself to better publicize the advantages of migrating personal finances from physical to digital, otherwise the digital currency may lose some of its potential.
With information: Bloomberg, TNW