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Tuesday, October 4, 2022

China Just Launched Its Digital Yuan

By some accounts, ancient China is the birthplace of currency. Around 770 BCE people there started exchanging coins for goods and services, though rather than the familiar round minted shape we’re used to today, these coins were cast in the shape of shells, or miniatures of common tools like spades or knives.

So, it might be fitting that the first country that could abandon physical money in favour of digital legal tender is China again. How will it work, what are the pros and cons, how is it different from cryptocurrency, and what does this mean for the rest of the cash-using world? Part of the reason China has taken the lead creating a state-backed digital currency is that they initially lacked the credit-card based payment infrastructure of other countries, like the US.

So, tech companies like Tencent and Alibaba developed apps that let people exchange money digitally with their phones. The apps have proven extremely successful, with hundreds of millions of Chinese citizens using them regularly. Six years ago, China’s central bank saw the upsides of developing their own digital Yuan. As of April 2020, the program is being taken for a test run in four Chinese cities.

The details on how the currency actually works aren’t very well known, but a few things are clear. The digital Yuan is tied to the value of the normal physical yuan.

Since its state-backed, that means the government is liable for it and it should be stable, compared to cryptocurrencies like Bitcoin, where the value can swing wildly. And because it’s backed by the state, that means it’ll be more widely accepted. Already, nineteen companies including McDonald’s and Subway are participating in the trial.

A major roadblock to the adoption of cryptocurrencies has been their lack of government recognition and widespread acceptance. But cryptocurrencies do have some benefits that Chinas officially sanctioned bucks lack, especially when it comes to privacy. A huge appeal of bitcoin and others like it is the blockchain, an encrypted and decentralized ledger tracking where the money goes.

While the blockchain is public, anybody using it can remain anonymous. But if China’s central bank develops and distributes the currency, then they can see exactly who is involved in every transaction.

China has a notorious history of being a surveillance state, and this could be another avenue to continue their monitoring methods. All of these advantages and disadvantages to each approach have left the future of digital currency up in the air, and its anybody’s guesses what’ll happen next.

Will the digital yuan spread globally because of its convenience and stability, or will the rest of the world opt-out of handing their financial data over to China? Will the U.S. government attempt to digitize their own dollar? Nobody really knows the answer to any of these questions yet, but fortunes will be won and lost as we find out.

I’m no financial guru but I will make this prediction: while a digital currency seems all but inevitable, not everyone will have access to the technology to use it, and others will still prefer old-fashioned physical money.

Even if the digital currency becomes widespread soon, cold hard cash isn’t going to vanish. At least, not right away. If you’re curious about encryption, check out this video I did on prime numbers.

So what would it take for you to use a digital currency? Let us know in the comments below and make sure to subscribe.

Thanks for watching and I’ll see you next time.

Read More: Is Cryptocurrency Dead Money?

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