Speaking generally, digital currency can be divided into three distinct types, cryptocurrency, virtual currency and central bank digital currency (“CBDC”). Nowadays, when people are talking about digital currency in China, most are talking about CBDC, which is issued by the central bank of a country.
In 2014, China’s central bank established a special research team to conduct in-depth research on digital currency issuance and business operation framework, key technologies for digital currencies, the issuance and circulation environment, as well as potential legal issues therein. In April 2020, 19 retail companies and restaurants firstly took the lead in using CBDC in the state-level new area, Xiongan New Area. At the beginning of 2021, the Chinese government held an official lottery in Shenzhen where a hundred thousand citizens of Shenzhen received a red envelope of CBDC worth RMB 200.
Compared to cash, it’s easy to see that CBDC can save in the costs associated with producing paper, printing, cutting, storage, and the transportation throughout the entire process of physical currency production, thus reducing the costs of traditional paper currency issuance and circulation, and improving the convenience of economic transaction activities.
Some people may doubt that the effect of CBDC can be similar to that of third-party payment platforms such as Alipay or WeChat Pay. In fact, the essence of a third-party payment platform is still to settle transactions based on money stored in commercial banks. In contrast, the function of CBDC is to replace the currency which is in the form of notes and coins. Therefore, CBDC can be directly deemed as cash, while the funds contained in Alipay or WeChat Pay accounts can only be deemed as cash stored in the bank or on the platform account.
For most people, the difference will not influence their feeling when using Alipay or CBDC to conduct transactions, however, the sense of anonymity is a central feature associated with CBDC. If a person conducts every monetary transaction via Alipay, the owner of Alipay, a private company, can easily find out what this person does every day. In addition, third parties may also discover some of his/her personal information through his/her transactions. When using CBDC, third parties cannot easily access your personal information as the current policy of CBDC regarding anonymity is that transactions of a small amount can be anonymous, while larger amounts shall be traceable.
Along with the public’s rising awareness of protecting their private information online, CBDC can be a monumental help in this regard. At the same time, the convenience of electronic payments can also be preserved by CBDC. Therefore, it is foreseeable that CBDC may be a popular development in the future of digital currency in China.
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