China is the only country whose government has a backup plan for using digital currency in response to monetary crises. The official trading platform of Digital Yuan provides fast deposits, withdrawals, and trading strategies to bitcoin traders. There were rumors that the Chinese government would issue a CBDC before they issued their national cryptocurrency.
It’s not hard to see why China would want to make this move. Involvement with digital currency could give them more control over monetary policy and help them regulate capital outflows more effectively than with an international cryptocurrency like Bitcoin. Digital Yuan will be an asset for the Chinese government to manage the economy better.
China is moving towards a cashless society where everything is controlled by digital transactions instead of physical transactions. The country is already leveraging this with its mobile payment system, WeChat Pay and Alipay. However, as of now, nothing is backing up these digital transactions.
The biggest problem in China today is trust, as people are becoming very wary about placing too much faith in their government and financial institutions- hence a CBDC helps to establish trust in the government, allowing greater transparency and control over monetary policy. In addition, the Chinese government is eager to put its currency into a digital format. It is a big step towards pushing the country to adopt an electronic currency, which should be ready by 2020 with the aforementioned mobile payment systems.
However, some adoption will decline mainly because of cultural reasons. There are still small areas where cash is preferred, and many people would not accept digital money – this is because they feel cash keeps them in control of their money and protects them from any adverse side effects resulting from using digital yuan-like identity theft, electronic fraud and hacking of financial records among others.
Digital Yuan can help in reducing money laundering:
China is increasingly worried about money laundering and illegal funds leaving the country. The government passed a law in 2014 which asks financial institutions to install anti-money laundering software and to report suspicious transactions, which is an effective measure in curbing money laundering. However, digital currency cannot help this problem as it’s prone to hacking and identity theft, while traditional money can only be physically carried. On the other hand, the Digital yuan can help fight corruption:
In recent years, the Chinese government has been cracking down on corruption. Recently, a user reported that an official of China’s top anti-corruption agency had been arrested while transferring funds abroad using WeChat Pay. It made many people worried about their financial privacy and security. However, if the Chinese government issues a CBDC, it would be a step closer to preventing corruption by allowing greater control over electronic transactions without fear of being monitored by the government.
China will make use of the advantages digital currency provides:
Bitcoin is not ideal for commerce where transaction volume is high and the time between transactions should be short. A CBDC provides an environment with optimal efficiency for commerce. For example, vendors can use digital currency to transfer funds without waiting for third-party processing or a bank wire transfer. Also, the government can use a CBDC to connect all government databases, civil servant salaries, and financial information so that you can go online to check everything about your taxes, social benefits, and debts. This experiment aimed to study how digital currency performs under certain economic conditions and determine whether it adversely affects the country’s economy – like inflation.
Digital Yuan is helping in decreasing tax evasion:
A CBDC can help the country better track financial activities and broaden its tax base. It is especially crucial in a country like China, with its growing middle class and significant capital. Digital currency will let the government know how much tax is due and paid by citizens.
China will make use of digital currency to transfer funds efficiently:
Earlier this year, there was an announcement that WeChat Pay would launch a digital settlement system for its users, allowing businesses to receive payments from customers via electronic settlement directly from the merchant’s bank account with no additional costs incurred on the merchant. Digital currency will increase efficiency in transferring money across borders, reduce transaction costs and save time by eliminating third-party processing. Digital Yuan will also increase efficiency in local transactions by allowing payment to be settled directly from person to person. In addition, the digital currency is based on a blockchain, so the transaction record can easily be checked and verified to ensure accuracy and transparency.
Digital Yuan will help in reducing capital outflows:
In 2014, China issued an alert stating that it would ban all residents from buying real estate overseas. This is because it was suspected that many Chinese were using offshore companies for property investments. Digital currency will help people avoid being targeted by this measure as transactions can now be made by people in a digital format without using personal information or documents. It could also help them avoid frequent movements abroad, which could be seen as suspicious and therefore be at risk of being targeted for tax evasion. In addition, China will use digital currency to boost exports:
The government is also planning to implement a local currency system, which will act as a parallel currency to the yuan. The digital currency can be used as a local currency by the government so that it can support its exporters and traders. As of now, the yuan is too weak to play its role in boosting exports because it still needs to be widely accepted outside of China. It could be solved by introducing the digital yuan into circulation, which would help boost exports by making China’s products more competitive.
