A New Yuan?: China develops the first Government-Backed Cryptocurrency
July 8, 2021
3 min read
What's going on here?
The People’s Bank of China has developed its own digital currency called the digital Yuan.
What does this mean?
The E-Yuan is based on blockchain technology, similar to cryptocurrencies like Bitcoin and Etherum. The digital currency will be transferred to users through an app called ECNY, allowing users to buy goods and services. For instance, in China’s recent trial run, LU Qingqing was credited with 200 Yuan which she then used to buy books. Quingqing commented that “it felt like real money”, demonstrating the E-Yuan’s success in the beta period.
From a legal standpoint, the E-Yuan is as legitimate as fiat cash. Moreover, the People’s Bank of China backs the E-Yuan, giving users added security that is not guaranteed with other digital payments like Bitcoin. This means that if a user’s provider of E-Yuan defaults, the user will be credited with the same value of E-Yuan in a new wallet. Such financial policies are aimed at increasing the E-Yuans credibility, which will hopefully attract more users to the digital platform in the future. However, the historian, Nial Ferguson, believes there are some inherent dangers in allowing China to “mint the money of the future”.
What's the big picture effect?
The E-Yuan is the latest instalment in a plethora of novel e-currencies introduced in the last decade. The COVID-19 pandemic has accelerated society’s shift towards full reliance on digital payments like Paypal and Bitcoin. However, it is useful to pause and take note of the potential disadvantages of these developments. For instance, the E-Yuan is distinct from other cryptocurrencies as it is governed and backed by the Chinese government. This gives rise to privacy concerns, as it is believed the Chinese government will be able to use its control over the E-Yuan to further monitor its users’ behaviour. It would be hard for the law to temper this type of surveillance as the Chinese government would first need to bolster existing privacy laws. Therefore, given this conflict of interest, it is unlikely that the required privacy framework will be implemented before the E-Yuan’s full inception in 2025.
In addition, the E-Yuan poses significant threats to traditional banking methods. If users withdraw their money from standard banks to switch to the E-Yuan, then China could face a ‘run on the banks’ type situation. This is where customers withdraw their money simultaneously, thus depleting the bank’s liquidity. When this occurs on a large scale, banks can face bankruptcy which undermines consumer confidence and damages the national economy. Therefore, there is an urgent need for controlled implementation to ensure a steady and stable transition from current banking to the E-Yuan. However, this is easier said than done, and often governments have failed to control consumer behaviour during times of systemic change.
Finally, it is useful to consider the effects of the E-Yuan on global finance. The E-Yuan can be characterised as a prototype which may later be used as a blueprint for other national cryptocurrencies. Therefore, the UK and other Western countries will be taking a keen interest in the currency’s development with one eye towards the future. This means we may be seeing an E-pound in the coming years, but can the UK economy adapt to the challenges these digital currencies create?
Report written by Luke Cuthbert
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