The Digital Yuan Passes The Internal Tests: How Will The Chinese Virtual Currency Change The Global Financial System?
The Chinese digital currency is going through internal tests that seek to test the security level of the 'cryptoyuan', informed the vice president of the Central Bank of China, Fan Yifei.
The crypto currencies became the asset with the fastest growth of the year: according to the Chinese agency Xinhua, throughout 2020 the index of crypto currencies Bloomberg Galaxy grew 65%.
By way of comparison, the second most profitable asset, gold, only rose by 25%. Nevertheless, Chinese authorities opted to create a digital yuan instead of legalizing the existing cryptocurrencies.
For the time being, pilot tests are taking place in four Chinese regions. The area is expected to be expanded for the Beijing Winter Olympics in 2022.
The creation of the cryptocurrencies was a response to the 2008 global financial crisis that caused many people to be disappointed in the traditional financial system. To date, there are thousands of cryptocurrencies and digital assets, all of them decentralized.
Paradoxically, Blockchain technology allows for total transparency without losing anonymity, and due to the fact that data is stored in encrypted form, it is impossible to identify the owner.
At the same time, the system itself guarantees the transparent registration of all transactions, something that makes it impossible, for example, to carry out the same transaction twice or to pretend that there was no payment.
According to the ideologues of cryptocurrency, the absence of a single issuing and processing center should ensure its reliability, since it was impossible to remove, devalue or freeze the cryptocurrency.
At the same time, users were protected against fraud, since the Blockchain allows the owner to access the list of all transactions to ensure that everything is correct.
However, such a system did not prove to be so convenient in real life. First, the classic Blockchain requires huge computing resources, which slows down the processing of transactions.
Second, unregulated cryptocurrency prices are very unstable, so owners of digital assets do not have the opportunity to protect themselves against potential financial risks.
Although many countries, including China, have not legalized cryptocurrencies, they have taken advantage of some of their features.
For example, if a regulator owns a Blockchain, it will be able to track almost any transaction in the economy.
In theory, this means that a centralized cryptocurrency could help end the illicit economy, increase tax revenues and better regulate the amount of money in circulation. In other words, it would provide the Central Bank with very powerful control tools.
In addition, the particularities of the information systems used in the digital economy would allow more transactions to be made almost instantaneously and anywhere in the world.
This means that technology could make a great advance in the global financial system and cross-border payments. Finally, it would help solve the problems of people who do not have access to banking services: all they need is an electronic wallet.
From 2014, China has been actively working on the creation of a national virtual currency. According to a study by the Bank for International Settlements, by mid-2020, at least 36 central banks in different countries were studying digital currencies to some extent.
However, it was China that made the most progress in this area. In particular, banks in some regions of the country were offering their customers to use electronic purses and conduct transactions in digital currency.
Thus, officials in the Suzhou area were compensated for their transportation pass in digital yuan. Pilot tests of virtual currency are essential, because any failure is capable of creating economic problems at the national level," He Xiaoyu, the chief economist of the Zhengxin Investment Group, told Sputnik.
The specialist emphasized that this is a rather complicated process that includes changing the financial habits of the country's neighbors. "It is necessary to test it several times before putting it into circulation," Xiaoyu said.
Although virtual currencies seek to reduce the cost of financial services and make them more accessible, the development of national digital currencies is more successful in countries that already have a mature financial system and at the same time a high level of technology.
Therefore, it is not surprising that China is the leader in this field, as the Asian country constitutes the largest mobile payments market in the world.
For example, last year, four out of five transactions were made through the Chinese systems Alipay and WeChatPay.
This is one of the reasons why Chinese society is more ready than others to use digital currencies, according to the expert.
China is at the forefront of this process. Digital currency includes innovative technologies used by the payment tools WeChatPay and AliPay, he said.
The economist indicated that some Western countries believe that such technologies put the user's privacy at risk.
And in some countries, such as Japan, some of the companies started accepting Alipay to make Chinese citizens spend more money in their country.
It is not yet known how the final technical implementation of the digital Yuan will be. If we take into account the statements made by the officials of the Central Bank of China, we can assume that in a first stage the virtual currency will replace cash and will not require a bank account.
It will probably be used through NFC technology, even without an internet connection.
There are debates about whether the cryptoyuan could challenge the hegemony of the dollar and become a new world currency thanks to digitalization.
Analysts at Deutsche Bank believe that the use of the Chinese virtual currency could end the need to use the services of SWIFT (Society for Worldwide Interbank and Financial Communications), something that could turn the yuan into a global reserve currency.
Previously, the dollar became a reserve currency thanks to the start of commodity trading in that currency. So possible changes in the financial system could completely change the balance of forces in the global currency market.
It should be noted that the internationalization of the yuan is not only hampered by external reasons, but also by internal ones, such as the absence of free conversion of the Chinese currency or capital control.
However, if China successfully tests and launches its own digital currency it will be a very important innovation worldwide and an example for other countries. And if the world gradually begins to digitize its currencies, the existing financial system will be transformed completely naturally.