China’s ban on initial coin offerings is just the beginning of its bid to control the use of cryptocurrency in the country. More than 1.9 million citizens applied for the country’s new digital currency, with 2.3 percent of applicants receiving the free virtual money. China kicked off its digital currency test by distributing 50,000 virtual red envelopes, with 200 digital yuan or $29.60. More than 3,389 stores are set to receive electronic payments as China tests and promotes the nation’s new digital money system. Although it is not officially launched, the test distribution will allow officials to gauge the success of the country’s new currency, developed to dominate bitcoin, and possibly rival the dollar in global currency.
The difference between China’s new digital yuan and cryptocurrencies is that its central bank backs the digital yuan and the digital currency sits in a digital wallet. Cryptocurrencies are transactions on a blockchain network on the internet. Six of China’s state banks are participating in the digital yuan’s pilot program that includes the mainland’s major cities and is set to expand to Hong Kong and other areas. Surprisingly, Bitcoin itself is not banned by the Chinese government, and it is legal to own it. The government recognizes blockchain technology as vital to technology enhancements. It is developing its own infrastructure to compete in the blockchain global market.
Due to the rise in legal disputes involving Bitcoin, the Chinese government stepped in to provide some regulation and implement policies to control the currency. First, the Chinese government did not recognize Bitcoin as legal tender but as a virtual currency. Later, the People’s Bank of China issued a notice on preventing Bitcoin risks. Therefore, trading platforms and the use of Bitcoin as legal tender are prohibited.
In 2017, the country banned initial coin offerings on new cryptocurrencies and shut down exchange platforms. Even platforms located outside of China’s borders are subject to the country’s laws if a Chinese citizen invests in ICO and cryptocurrency trading on exchanges in other countries. In response, an alternate business model, Initial Miner Offerings (IMO), sells investors equipment to mine cryptocurrency and give rewards for mining cryptocurrency. China soon shut down the IMO market also. Most local Bitcoin mining operations have moved to different countries that are receptive to cryptocurrency mining activity. Many exchanges have adjusted business processes to avoid running foul of Chinese law. Peer-to-peer selling allows investors to buy from other investors and pay via bank transfer or digital wallet. China has simply blocked access to overseas cryptocurrency exchanges for its citizens.
Despite China’s fight to prevent citizens from using cryptocurrency exchanges, the country has launched a blockchain network with an international structure to help establish a blockchain technology project less expensively. More than 2000 developers are using the new infrastructure, which project managers may use for smart cities, databases, and the economy. China’s own cryptocurrency, the digital yuan, is the only legal cryptocurrency in the country, and it’s only the beginning. China plans to provide information services to global partners with blockchain technology.
China hopes for the international use of digital yuan in global economies. If the vision is realized, the digital yuan could rival the dollar. For this to happen, the new currency needs more than robust technology. Wide acceptance of the virtual currency is necessary to facilitate global usage. Otherwise, anyone accepting the digital yuan as payment for goods will still have to convert it to the dollar, euro, or another widely used currency to purchase goods elsewhere. In global financial systems, the dollar dominates, with nearly 40 percent of Swift transactions occurring in US dollars. Comparatively, the yuan is used in less than two percent of transactions.
However, the digital currency gives China broader control over electronic payments within its borders. Currently, 94 percent of digital financial transactions occur through WeChat Pay and Alipay. The future of these two financial service providers to Chinese citizens is unclear. China could simply ban the use of other digital wallets, eliminating major rivals to its new digital yuan. Expansion for the new money system could come from partnerships with prominent Chinese-owned technology firms, such as TikTok, which has more than 800 million users worldwide. Even Fortnite, a popular video game with more than 350 million global players, is 40 percent Chinese-owned and could provide a platform for expanding the digital yuan’s distribution and international acceptance.
Perhaps the country has yet to block Alipay and WeChat Pay because the services are so widely used by Chinese citizens. Each digital wallet is connected to a popular online platform, Alibaba, and WeChat. The payment war between the two companies may cease, as the digital yuan threatens to dominate the market. Here are the benefits of Alipay, WeChat Pay, and the digital yuan.
- Part of the Alibaba Group, one of the most popular digital firms in China
- Product promotion that brings overseas products to mainstream citizens
- Integrated with two of China’s leading e-commerce providers, Taobao and Tmall
- Encrypted technology with advanced security measures
- AR Code solutions for payment
- Transaction insurance
- Advanced security features
- Partnered with major financial firms, such as Visa, Discover, and Amex
- China’s direct connection to Chinese consumers
- Advanced digital payment infrastructure
- No interest payments
- No need to carry cash
Whether Chinese citizens switch to the new digital yuan or continue using these other digital currencies remains to be seen. Likely, the country will exercise its power to control financial activities to ensure widespread use of the new service once available to all citizens. After broad distribution, Chinese citizens may use digital yuan on a wide variety of services and products. Like Alipay and WeChat Pay, citizens are free to spend digital money on everything from taxis to groceries.
Unlike Bitcoin and other cryptocurrencies, the digital yuan is not an anonymous transaction. The difference is, China is watching every currency exchange, giving the government’s unprecedented control over the country’s financial structure. As the digital yuan is set for international distribution in the future, China’s plan to dominate global financial markets is one step closer to reality.