China has begun the third round of its digital currency testing. The exercise took off on January 20, in Shenzhen, as part of a larger scheme to introduce the E-Yuan in mainland China. As part of the project, a total of 20 million digital yuan will be issued to residents of the local Longhua District.
Pandaily reported that up to 100,000 so-called “red envelopes”, each with an amount of 200 yuan, will be given out to those who have purchased social insurance from the commercial entities they work for and intend to stay in the jurisdiction for the upcoming lunar new year holiday.
The pilot run will be conducted in the form of a lottery, similar to former experiments. At 10:00 a.m. on Jan. 26, the event will draw lots to select 100,000 winners, according to local media Yangcheng Evening News.
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This is the third round of digital currency experimentation going on in the city.
The first test was held in Luohu District, where the central bank issued 10 million e-yuan in October 2020. When a second round was conducted in Futian District at the beginning of this year, transactions rose to as much as about 18 million yuan in the ten days between Jan. 7 and 17.
The second round also expanded the e-yuan use scenarios, increasing participating merchants and shops from 3,000 to more than 10,000. Among the fields covered were transportation, medical, entertainment and retailing.
The newly-launched round also added two more supporting banks – the Bank of Communications and the Postal Savings Bank of China.
Besides Shenzhen, the central bank last year carried out closed tests in Suzhou and Beijing.
Pandaily reported that the digital currency frenzy is not confined to the mainland, as Hong Kong is also looking forward to testing digital currencies in the near future.
On Dec. 4, 2020, the city’s Monetary Authority began working with the Central Bank’s Digital Currency Research Institute to study technical tests for the use of digital currency for cross-border payments, and make corresponding technical preparations, according to the official former’s website.
Since 2014, China has been studying merits and demerits of digital currency and how best to roll it out so that it doesn’t disrupt existing financial structure. Developing a national digital currency involves complex technicalities that take time, and if done wrongly, would make users lose their money.
China is pushing to become the first major country in the world capable of monitoring economic activity in real-time through digital currency called e-yuan, and the central bank governor, Yi Gang wants to learn real-time data management from the private sector to guide the growth.
The e-yuan, called Digital Currency Electronic Payment (DC/EP), will facilitate e-wallet payments in place of fiat, allowing citizens to carry out financial transactions digitally. The Chinese central bank is speeding the project up as it aims to develop a cashless economy.
Former IBM executive, Richard Turrin who is writing a book on China’s digital currency said “the time table has been sped up by the coronavirus and the realpolitik of US-China relations.”
But apart from that, China recently has increased its oversight on its online industry, including the fintech sector which has blossomed without government’s regulatory interference over the years. The recent clampdown on big players in China’s online financial space, including Ant Group, shows the government’s growing interest in the sector. And the launch of e-yuan which is supposed to be in partnership with big players in the fintech, is believed to be part of the government’s ploy to keep an eye on the industry.
Moreover, China appears keen to lead the world of digital currency by being the first country to launch national digital money that is widely used across the country. The plan is believed to have been accelerated by the outbreak of COVID-19 and US’ disapproval of Libra.
“China is positioning itself as a trailblazer when it comes to the future of money,” said Henri Arslanian, a cryptocurrency mogul and adviser to central bank. “Libra was the catalyst, and COVID-19 has accelerated central bank activities.”
However, there have been concerns about how a national digital currency will affect the banks.
The PBOC told the IMF that the e-yuan will be likely limited to small retail transactions by setting maximum daily and yearly limits on payments and that it will only process large amounts by appointment. It added that it may apply charges for large sum or high-frequency transactions, and will not offer interest on accounts.
The central bank conducting the third digital currency trial indicates that a promising amount of success has been recorded, and that China is on the verge of releasing e-yuan for national use.
IMHO, the e-yuan will be one of the tools used by China to leverage the yuan into a global reserve currency. By starting with small-sized transaction and working out the bugs there, then China builds trust in the e-currency as a currency. Because the currency is issued and managed by the People’s Bank of China, the RMB is a stable currency usable in most financial settings unlike other crypto currencies which fluctuate wildly.
Seems to me, that the initial value of a fiat currency is linked to the productive capacity of the users of the currency, which is mainly the country of origin. China GDP is the highest right now. The USD is weakened not only because its GDP is down, but also because it is linked to oil, and the world is rapidly transitioning to renewables.