The arrival of the e-CNY is the latest chapter in China’s rocky history with cryptocurrency.
As athletes from around the world converge on Beijing to compete in the Winter Olympics, China used the occasion to debut the digital Yuan.
The arrival of the e-CNY is the latest chapter in China’s rocky history with cryptocurrency.
In June 2021, Chinese officials renewed a crackdown on the cryptocurrency industry, with authorities in China’s Sichuan province, once one of the country’s biggest mining centers, ordering crypto miners to shut down operations.
‘First Mover’ Advantages
In early January, China’s central bank issued pilot versions of its wallet application for the digital yuan as the country steps up efforts to develop its official digital currency.
U.S. Senator Pat Toomey expressed concern about the digital yuan.
In a letter to Treasury Secretary Janet Yellen and Secretary of State Antony Blinken, Toomey said “analysts have raised the e-CNY’s potential to subvert U.S. sanctions, facilitate illicit money flows, enhance China’s surveillance capabilities, and provide Beijing with ‘first mover’ advantages, such as setting standards in cross-border digital payments.
“China’s crackdown presents an opportunity for the United States to be the forerunner of crypto innovation, grounded in individual freedom, and other American and democratic principles,” Toomey added.
As far as what’s happening on the ground, Wall Street Journal reporter Liza Lin tweeted that “I’ve not seen anyone use the digital currency yet.”
Tammy Da Costa, analyst at DailyFX, said that although China has cracked down on the crypto industry, “prohibiting the mining and use of bitcoin as a form of payment, digital Yuan allows regulators and the government to trace all payments made without the need for banks or other financial intermediaries.”
A Threat to Global Regulators
“With global central banks now following suit,” Da Costa said, “bitcoin still poses a threat to global regulators who are eager to enhance the transparency of transactions on blockchains. However, with more stringent measures now being imposed, the original cryptocurrency may still be able to exist alongside digital currencies.”
“The Yuan is already one of the largest and most dominant currencies in the world,” Keegan Francis, bitcoin and crypto specialist, Finder, said. “Making a digital version will enable a wide degree of accessibility, scalability, and efficiency against government currencies that do not have a digital version.”
While most currencies are already digital, Francis said they are not implemented within a central bank digital currency, or CBCD, type of system.
“A CBDC is a single ledger controlled and operated by the central bank of the respective country,” he said. “The main distinguishing feature of the CBDC that China is building is that all instances of digital Yuan are subject to centralized control.”
This means, Francis added “that individual accounts can easily be frozen, payments to specific destinations can be censored, and every transaction may be tracked to enhance the profile of Chinese citizens within the already established social credit system.”
“Some of these new features fly in the face of the development that has taken place within the world of cryptocurrency,” he said. “In contrast, bitcoin transactions cannot be stopped, addresses cannot be frozen, and all transactions are permanent.”
Follow in China’s Footsteps
The implementation of a CBDC actually becomes an attack vector for cryptocurrencies, Francis said, “as the central bank can now stop transactions wherein citizens wish to acquire cryptocurrency.”
“With all of this being said, the implementation of more authoritarian-style CBDC’s creates an opposing demand for money that is more representative of freedom,” he added. “The implementation and mandated use of CBDCs may actually have the opposite effect on cryptocurrencies. Instead of limiting their growth, it may bring attention to how much cryptocurrencies like bitcoin are needed.”
Valentina Drofa, founder and CEO of Drofa Comms, said “it is obvious that the ban levied on bitcoin by Chinese authorities helped uplift the successful trials for the Digital Yuan project.”
“While many nations are developing their own CBDC, with a few having launched theirs, China remains the largest economy that has made significant headway, and the Olympic Games debut justifies the country’s ban of bitcoin and all things crypto in the past year,” she said. “By implication, other regulators may also want to follow in China’s footsteps as the popularity of cryptocurrencies will always pose as a threat to established sovereign monetary systems.”
While China is an example to a lot of countries, Drofa said “those who chooses to regulate crypto in order to make them co-exist with fiat and CBDC have the tendency of having a more robust and competitive financial landscape”.
