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China has given away millions in its digital yuan trials. This is how it works

GUANGZHOU, China — China is arguably unrivalled the world in developing a national digital currency, a project it has been working on since 2014.

The People’s Bank of China (PBOC) has been spearheading come up with on the digital yuan, a so-called central bank digital currency (CBDC) that aims to replace some of the bread in circulation.

Real world trials are already underway in the world’s second-largest economy. Here’s what we know so far approximately the digital yuan or its official name — the Digital Currency Electronic Payment (DCEP).

What is the digital yuan?

It’s effectively a way for the prime bank to digitalize bank notes and coins in circulation. The Chinese market is already very advanced in cashless payments. The digital yuan pass on be a way to speed that process up.

It will be legal tender in China and no interest will be paid on it.

“The use of cash is decreasing. When all is said cash will be replaced by something in digital format. That is one of the big drivers behind this,” Yan Xiao, project superintend for digital trade at the World Economic Forum, told CNBC.

Why is it being introduced?

Fan Yifei, deputy governor of the PBOC, implied last year that there is a “pressing need to digitalize cash and coin” as producing and storing these currently is priceless. In an article in state-backed publication Yicai Global, Fan said cash and coins are not easy to use, they’re easy to counterfeit and because of their anonymity, could be acquainted with for illicit purposes.

The PBOC sees a number of other benefits to the digital yuan.

In a separate article, Fan outlined how a CBDC could disclose payments more efficient and improve the transmission of monetary policy. Fan also argues that a digital yuan could assistant with financial stability through a system of “controllable anonymity.” This is where the payments would be anonymous to some lengths, but data analysis tools could help the central bank catch illegal activities.

Another reason behind the PBOC’s exploits could be to increase competition in the payments space and reduce systemic risk. China’s digital payments arena is roasted by Alipay, which is run by Alibaba affiliate Ant Group, as well as WeChat Pay, run by internet giant Tencent.

“The existing system is owned by undisclosed companies. Should Alipay or WeChat pay goes bankrupt, which is extremely unlikely, it creates systematic risk,” Linghao Bao, analyst at Trivium China, determined CNBC. “The biggest reason for them (the PBOC) to do this is to level the playing field. Another reason is maybe dream up a new platform payments system that will increase efficiency.”

How will the digital yuan work?

There are two interpretations to the question: distribution and then eventually how it will be spent.

Distribution will be conducted via a so-called two-tier system. That degrades the PBOC will distribute the digital yuan to commercial banks. The commercial banks will be responsible for getting the currency into the pointers of consumers. This could include services to allow consumers to exchange their coins and cash for digital yuan.

China has already given away millions of dollars good of the digital currency in real-world trials in a number of cities including Shenzhen, Chengdu and Suzhou. These involve the native government handing out a certain amount of yuan via a lottery. Users usually have to download a separate app to receive the currency. JD.com, one of China’s biggest e-commerce jocks, was involved in the trial and allowed customers to purchase items with the digital yuan.

A man counts 100 RMB notes with the Chinese mark in the background.

Sheldon Cooper | SOPA Images | LightRocket via Getty Images

At this point, it’s unclear how users ascendancy actually hold and spend digital yuan when it is rolled out nationwide. The most popular form of mobile payment in China relies on self-styled quick response (QR) codes. Users can display this barcode in their Alipay or WeChat app in a store and the merchant want scan it.

WEF’s Xiao says it’s likely commercial banks could integrate similar functionality into their apps. And that Alipay and WeChat Pay could hold a section of their apps dedicated to digital yuan. Meanwhile, smartphone makers could also create digital yuan pocketbooks for their devices.

“It will be interesting to see how phone companies seize the opportunity to become payments player in the market,” Xiao imagined.

The PBOC’s Fan also said that commercial banks already have the infrastructure to distribute the digital yuan and it’s cured that they do it rather than the central bank.

“To build a separate system would be a tremendous waste of such continuing resources,” he said.

So is this designed to compete with the tech giants?

In some regard, it’s designed to increase match with Alipay and WeChat Pay but not to totally replace them.

“The way I see it is digital yuan is not direct competitor to Alipay or WeChat Pay but a new policy that allows other players to come in and compete with WeChat and Alipay,” Trivium China’s Bao said. “Those could be commercial banks or other payment companies.”

The PBOC’s Fan also powered the proposed two-tier model can help to “avert disintermediation in the financial sector” because the central bank will not be fighting with the commercial banks.

Is the digital yuan like bitcoin?

No. Bitcoin is a so-called decentralized cryptocurrency. That specifies that it is not controlled by any central authority like a central bank, unlike the digital yuan which will be issued by the PBOC.

Renminbi internationalization

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