HONG KONG – China has concluded its largest-ever pilot project to date for a central bank-backed digital yuan, with analysts saying the trial extended the country’s lead in the global race to develop a central bank digital currency (CBDC).
Under the trial program, the central bank distributed “red envelopes” - a reference to China’s traditional way of gifting cash - in the form of online wallets containing 200 digital yuan ($29.75) each to 50,000 randomly selected consumers, according to Reuters.
Reuters noted China’s digital yuan is probably the most advanced of the several CBDC initiatives that are being developed around the world, and that many central banks, including the People’s Bank of China (PBOC), are concerned about cryptocurrencies like bitcoin or private projects like Facebook’s Libra gaining widespread traction, restricting central bank control of flows of funds.
The PBOC has been working on its digital yuan program since 2014, though it released few details until last year. Some crucial aspects, like an estimated launch timeline, remain undisclosed, Reuters said.
The Results
According to the Chinese government, a series of pilot programs, most notably in Shenzhen in October 2020 have shown that the digital yuan can work on the ground when paying for goods.
Lifestyle apps including ride hailer Didi Chuxing and food delivery company Meituan Dianping have also been involved in the trials, Reuters added.
From a user perspective, Reuters said the process is rather like China’s existing commercial digital payment methods, like Alipay and We Chat Pay: users download digital wallets in which they can store their funds, and which generate a QR code that can be scanned by payment terminals in shops.
“The system is more complicated than that, however. The digital yuan is designed to replace cash in circulation, such as coins and bank notes, not money deposited long-term in bank accounts,” Reuters reported.
Role of Commercial Banks
Commercial banks will have a role in distributing the digital currency to users, and to do so they must deposit exactly the same amount of their reserves with the PBOC as the digital yuan they distribute, Reuters reported, adding both commercial bank distributors and the central bank will keep databases tracking the flows of digital yuan from user to user, something that they cannot do as effectively with coins or banknotes.
Unlike cryptocurrencies like Bitcoin, the digital yuan will not use blockchain, distributed ledger technology which allows transactions to be validated without the need for banks, the report added.