The traditional payment process involves paper checks and payments that involve multiple parties- all of which can take days to settle. Not only a bank but also its partners and regulators could be based anywhere in the world. China’s Renminbi is now the first national currency to abandon its physical form, thanks to digitization efforts spearheaded by its central bank. Click image below to start your trading journey.
You may wonder why China was eager to embrace a digitalized monetary system. At the same time, the US still has yet to make the transition- especially given that Beijing is well aware of Bitcoin’s volatile nature and Silk Road associations. So what’s behind China’s sudden push toward digitization? And what are the implications for Western economies?
What Is A Digitized Money?
Digitized money, or digital currency, is an electronic medium of exchange (like a credit card) controlled by a central authority. An issuer of such currency usually backs it with its fiat currency reserves or other assets.
HOW IS A DIGITAL CURRENCY USED?
Citizens can use digital currency to purchase online goods in the same way that one would use a credit card. A user will have an account with the currency issuing authority – who, in China’s case, is the People’s Bank of China. However, the digital currency does not only apply to online transactions; it is also accepted for payment at retail stores and restaurants that display a ‘Bitcoin Accepted Here’ sign.
How do the digital Yuan works?
The digital currency is issued by the People’s Bank of China, or PBOC, and can be used to make payments on the Internet. The PBOC has already made RMB-based virtual currency accounts available to Chinese banks and credit card companies. As a result, it will allow those institutions to process payments in virtual currency. In addition, a separate announcement expands Chinese banks’ ability to process Yuan transactions initiated by consumers in the country (albeit only for now).
The network of banking and payment intermediaries in China also provides instant conversion between local currencies (like the Renminbi). In addition, the PBOC has taken several measures to encourage digital currency usage, the most important being the creation of digital currency trading platforms. The first adoption related to digital currencies was in Shanghai in December 2013.
What is the impact on the Chinese economy?
Digital Yuan is a paperless payment medium that could bring tremendous benefits, including reducing transaction costs and enhancing convenience. Furthermore, such innovation will spur new business opportunities, investments, and innovation. Digital Yuan would provide immense convenience and boost economic growth in China; it could even raise exports and production efficiency by 20-30 per cent.
What is the value of the digitized Yuan?
The PBOC has created RMB-based exchange-traded funds (ETFs) on the Shanghai Stock Exchange. The initial market response to these offers has been positive as the potential for profit opportunities attracts investors. However, there is some uncertainty about the value of these digital currencies. For example, time will tell whether the digital Yuan will appreciate or depreciate, as well as how this will play out in the long term. Furthermore, will the Chinese government allow people to trade in digital currency?
Although these trading platforms are still being developed and tested, some have already been launched, such as Chin bank’s CBDC and Jingpingyuan. Co. China is one of a few countries trading virtual currencies backed by government authorities. However, no other country is near china when it comes to digital money infrastructure, and china tends to be way ahead of other developed nations like the United States in terms of adopting digital money.
A private means of transaction:
As a result of the privacy and security provided by the digital Yuan to Chinese citizens, more individuals are expected to choose to use digital currencies for payment versus other traditional means. In addition, once the underlying infrastructure is there and the Chinese government officially allows the trading in digital currencies, it will impact other sectors, including financial services, insurance and retailing.
It could surge demand for payment and settlement platforms and data analytics solutions, providing much-needed investment opportunities. Furthermore, the digitized Yuan could make it easier for financial institutions to serve customers in China and overseas markets.
The PBOC is already testing digital currencies by allowing some banks to process payments in RMB backed by virtual currency. It also allows online merchants to accept payments in RMB through Alipay, an online business platform similar to PayPal that is operated by Ant Financial Services Group (the holding company of Alipay). However, it has led many investors to shift their attention towards Bitcoin, which has proven much more popular than China’s digital currency.
