What You Need to Know About China’s New Digital Yuan

As you may have heard by now, China has been in the process of developing its own national, digital currency. Trials began just a few months ago, with the digital currency being “adopted into the monetary systems of several cities” in what essentially comes across as a beta run. The currency — often called the digital yuan, but also referred to as the e-RMB — is the first of its kind to be designed and operated by a major world economy.

As we inch closer to the digital yuan’s deployment as a fully functional currency, the project is being framed in a number of different ways. Some have declared it to be a “Chinese cryptocurrency” and a potential competitor with bitcoin; some look at it more as a counter to Facebook’s long-awaited stablecoin, Libra; and others still are focused on the long-term implications and the potential for the digital yuan to unseat the dollar as the dominant currency in the world. All of these interpretations are understandable — but none quite hit the mark. For that reason, we wanted to make note of a few things you should know about this new digital currency venture.

It’s Not a Cryptocurrency

Perhaps the most important thing to understand about the digital yuan venture is that this is not a traditional cryptocurrency. It is meant to be wholly digital, and will involve some of the same benefits people seek out cryptocurrency for, such as quick transactions and perceived security. However, there are two ways in which it differs significantly from ordinary cryptocurrency, such as bitcoin.

First is that the digital yuan is not meant for speculation. Bitcoin today, while useful in some cases as a currency, is primarily useful in investment. To be clear, bitcoin is an asset class unto itself (along with other cryptocurrencies), separate from major markets such as forex and stock exchanges. But bitcoin is still traded similarly, with investors using various means — direct purchase, CFD trades, and futures speculation for instance — to attempt to profit off of its price movement. The digital yuan will reportedly not be featured in similar speculation environments (though it could conceivably be traded within the forex market, just as the yuan can be traded today).

The second key difference between the digital yuan and bitcoin and the broader cryptocurrency market is that the digital yuan will not be decentralized. In a sense the entire theory behind bitcoin and cryptocurrency is that they are not managed by individual entities. By contrast, the digital yuan is being created and handled by the People’s Bank of China, and will thus be a centralized digital asset.

It’s Also Not a Stablecoin

For those who might still be unfamiliar with the term, stablecoins have been generating a fair amount of buzz for the last year or so. We explained the appeal of stablecoins in our post about the addition of DAI and USDT to the CoinLoan platform: They are backed by stable assets and thus combine the best of the crypto and fiat worlds. Basically, they’re cryptocurrencies that are in theory less volatile, because their value is directly tied to other assets (like the U.S. dollar, or gold). Functionally, however, they can often be used in much the same way as cryptocurrencies. On our platform and mobile app, for instance, users can now invest in digital assets that include bitcoin (BTC), Tether (USDT), and many other types of currency. In this respect, there is little difference in utility.

Right now, Tether is perhaps the best-known viable stablecoin. But it was Facebook’s announcement of Libra that really brought the concept to the forefront of the crypto conversation. Libra has not yet come to fruition, but because the digital yuan is so often characterized as an “answer” to Libra, the stablecoin term gets thrown around. However, the digital yuan is also not a stablecoin. For one thing, stablecoins (like bitcoin) are investable commodities as well, whereas the digital yuan will not be. Additionally, however, the digital yuan will not be tied to a particular asset (or group of assets, as may be the case with Libra) that determines its value. It will, as far as we know, be valued just as the yuan is now.

Dominance Is an Open Question

The idea of the digital yuan coming to dominate the U.S. dollar as the world’s go-to currency has become a popular one. It makes for an exciting headline, and it plays into long-standing narratives of China easing into a role as the world’s preeminent economic power. Furthermore, there is something to the idea of China being first in what could become a global race to digitize currency. It’s certainly possible that the emergence of the digital yuan gives China an edge in this respect.

At the same time however, China is not alone in this pursuit. Other countries and large banks are pursuing various forms of digital currency, even as the digital yuan remains in a sort of preview state. This makes for a great deal of uncertainty surrounding this concept and the impact it will have on world economies, making dominance an open question.

Ultimately, the digital yuan looks to be a very exciting development. It is set to become the first fully digitized version of a major world currency. And even if it’s not strictly a cryptocurrency, stablecoin, or a play for world economic domination, it’s a fascinating development for digital currency enthusiasts to keep an eye on.

exclusively written for CoinLoan.io

by Rose Jane