China cites Bitcoin risks as justification for creating the digital yuan

Key facts:
  • According to the PBoC, the emergence of cryptocurrencies gave rise to the creation of this project.

  • This is the first technical paper published by the People’s Bank of China on the digital yuan.

The People’s Bank of China published the first digital yuan white paper.

The information was disseminated on July 16, 2021 through a working paper for the project of its digital currency, known as e-CNY. The document goes back to 2014 to explain the background, characteristics and development of the initiative that gave rise to the progress of the digital currency. The financial institution explained that one of the main causes to create the digital yuan was the emergence of cryptocurrencies, the risks and challenges that they transferred to the current financial system.

The PBoC wrote on this topic the following:

Adopting blockchain and encryption technology, cryptocurrencies like bitcoin are claimed to be decentralized and totally anonymous. However, given their lack of intrinsic value, sharp price fluctuations, low trade efficiency and huge energy consumption can hardly serve as currencies used in daily economic activities. In addition, cryptocurrencies are mostly speculative instruments and therefore pose potential risks to financial security and social stability.

The People’s Bank of China then noted that the development of the digital yuan was focused on addressing concerns raised by the fluctuation of cryptocurrency prices. The financial entity pointed out that this situation caused some commercial institutions to launch stableicons with which they tried to stabilize their values by tying them to sovereign currencies or other related assets.

The Bank warns that some commercial institutions would be thinking of launching global stableicons, which in its opinion, would bring risks and challenges to the international monetary system, as well as the payment system and cross-border payments.

Explanatory statement for the creation of the digital currency

The first objective of this project, as this document says on page 4, is to diversify forms of cash that the central bank provides to the public, meet the demand for digital cash and support financial inclusion.

As a second point they will focus on supporting fair competition, efficiency and security of the retail payment service. The text explains that this initiative builds on existing electronic payment technologies and complements the existing system.

Its third purpose is to echo the international initiative and explore improving cross-border payment. The report says it is preparing to take this step by exploring pilot tests that have been designed for this purpose, working together with central banks and monetary authorities to establish exchange, agreements and regulatory cooperation mechanisms on digital fiat currency online.

Regarding the design of the plan, he explains the following:

Those who do not have bank accounts can enjoy basic financial services provided through the digital currency wallet, and overseas residents temporarily traveling to China can open a wallet to meet daily payment needs without having to open an account in a commercial bank.

The document then refers to the protection of consumers ‘ rights and interests. Stress that authorized operators will properly handle potential disputes and client lossesin accordance with the relevant dispute settlement mechanisms.

The report also addresses regulatory issues. He points out that one of his objectives is based on establishing management for the business, clear requirements for operators, implementing laws and rules to strengthen protection for users and creating a safe environment for the use of digital currency.

Digital currency and smart contracts

In the section on the design features of the digital currency it indicates that one of its outstanding attributes is programming from the implementation of smart contracts. It reads as follows: “e-CNY obtains programming from the implementation of smart contracts that do not harm its monetary functions. Under the premise of security and compliance, this feature allows self-executing payments according to predefined conditions or terms agreed between two parties, to facilitate business model innovation.”

The PBoC highlights that one of its objectives is to establish rules to strengthen user protection and create a secure environment for the use of digital currency. Source: Crypto News

The 16-page document ends with how to mitigate the possible negative impact of digital currency on the economy and the financial sector. Their evaluation is being done through tests and practices in the pilot regions. He recalled that since last June 30, 2021, trials that have been conducted in several cities have recorded 70 million transactions in the amount of 34.5 billion yuan. This figure equates to USD 5.3 billion, across 20 million digital currency wallets to retailers and 3.5 million e-CNY commercial wallets.

It should be clarified that even though the PBoC has prepared this technical paper it does not when the launch of the digital currency is scheduled or other activities to be undertaken prior to its adoption in China.

However, everything seems to indicate, as Crypto News reviewed in March of this year, that China’s government is accelerating the development of the digital yuan to be used in the 2022 winter games. For this reason, it was working jointly with private companies in the development of a software for the implementation of this currency.

The intention is that people who attend the sporting event, which will take place between 4 and 20 February 2022, can use digital currency in hotels, restaurants, stadiums and other sports facilities.

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