China's Digital Yuan Is The New Future of Money. What About Bitcoin?

China is one step ahead in launching its very own digital currency, but would it have a huge impact on the Bitcoin market?

China's Digital Yuan Is The New Future of Money. What About Bitcoin?

Since the beginning of 2021, China has gradually expanded the rollout of its first central bank digital currency in order to help one-fifth of the population that remains unbanked into the formal economy.   

The digital yuan has the status of legal tender and is created by the central bank of China. It has no service fee and is said to circulate faster to replace banknotes and coins in circulation. Like China’s existing WeChat Pay or Alipay, users can use the digital yuan for payment by downloading digital wallets to store their cash. 

China’s government has already issued 40 million worth of digital renminbi to citizens of BeiJing, gradually making progress with the testing of digital yuan currency in other major cities like Changsa, Chengdu and Suzhou. As of now, around $300 million worth of transactions has been made which is largely considered a success and has caused distress for other central banks to begin creating their own digital currencies. 

If the digital renminbi succeeds, it would drive evolution to the digital economy in several ways. 

1) Maintain Social Stability

Unlike Bitcoin, the digital yuan is regulated by the national central bank and in accordance with the regulations and laws of the country.  It is also backed by the government which means the government is able to track financial transactions to eliminate tax evaders.

China is keen to safeguard the currency for daily purchasing transactions, peer-to-peer payments to others, interbank transactions, etc, with their well-developed nationwide wallet that ensures a safe and reliable payment system. 

Moreover, the rollout of digital currency will be able to bridge the gap between urban and rural populations. As the digital yuan can be integrated with China’s pre-existing system, this gives the rural population better access to banking services and to participate in the economy. In the future, salary payments, medical insurance or government subsidies can be directly distributed to personal wallets, greatly reducing management costs.

2) Promote Economic Development 

Under the traditional monetary framework, the central bank does not deal with ordinary people because loans are often issued without the involvement of central banks. But with the issuance of digital currencies, the central bank can directly issue subsidies to citizen's digital wallets without going through commercial banks, making payments more efficient and timely. 

Other than that, China’s central bank is able to extend help to small and medium-sized companies with digital currencies, which should also help push forward the fintech industry and the country’s economic development. 

3) Challenge the Dominance of the Dollar

There is no doubt that the US dollar is more convenient in international payments. According to the International Monetary Fund, over 60% of major foreign exchange reserves of the central bank are US dollars, making it a de facto global currency, led by the Euro which takes up 20% of international reserves.   

However, with China’s digital renminbi getting widely recognised, it may cause central banks to hold the currency reserves, giving the People’s Bank of China a greater influence on the global financial market. China will then become the leading digital currency player and will likely dominate a stronger position in the global economy, challenging the global dominance of the United States.

If the digital yuan is making such a big impact on the digital economy, how would it affect Bitcoin?

With China’s digital yuan being at the forefront, it would definitely bring a certain impact on the cryptocurrency ecology. This may help expand the digital currency ecology as digital transactions for Bitcoin and other cryptocurrency transactions with sovereign digital currencies or central bank digital currencies are made more convenient for exchange. It could also drive up the demand for cryptocurrencies in the future as China’s gain more control over its digital currency. 

On the other hand, there may also be a possibility that China may introduce politics to ban or limit cryptocurrency usage as their digital currency receives mainstream adoption, even though citizens are not banned from holding them. 

Anyhow, it doesn’t serve as a replacement for cryptocurrency. Both digital yuan and Bitcoin have substantial differences and the main difference is digital yuan is not a cryptocurrency. It is a digital form of fiat currency held by the People's Bank of China. By making the currency system into a digital network, the issuance of digital currencies will only reduce currency circulation.  

Another thing to note is that the digital yuan doesn’t have the anonymity of cryptocurrency nor is it decentralised, therefore any transaction made is entirely traceable by their central bank. Cryptocurrency also runs on a blockchain that executes smart contracts. Nevertheless, China has become the pioneer in the digital currency field which is a big step in driving the evolution of the digital economy and expanding the financial ecology. 

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Disclaimer: Opinions expressed in Altimates are not intended to be a forecast of future events, a guarantee of future results, and investment advice. All investing is subject to risk, including the possible loss of the money you invest. Please do not invest in cryptocurrency without understanding its fundamentals.