How is China’s sovereign digital currency different from a cryptocurrency like bitcoin?

China’s digital yuan is managed privately by the PBOC under a centralised system, which is the complete opposite of most other forms of cryptocurrencies that are designed to disperse power away from the government.Widely-traded virtual currencies, such as bitcoin,  op erate under a public, decentralised computer network based on blockchain or distributed ledger technology, existing outside the control of a central authority.

In dividual holders of the currency are the ones that verify the increase and distribution of the digital money as well as its transactions, rendering them immune to government interference.

But bitcoin, along with many of these cryptocurrencies, faces criticism for being vulnerable to illegal activities and volatile trading prices.The DCEP system does not use blockchain technology, increasing the PBOC’s presence in the financial system and the risk of political interference. Theoretically, the greater power given to the PBOC by the DCEP would allow it to have more control over the total volume of money supply according to economic conditions.

DCEP, though, operates through a two-tier operating system. The PBOC issues the DCEP to commercial banks and other commercial operating agencies without using blockchain, but the lenders and other agencies are allowed to use the technology to distribute the digital yuan to the public.

More information on business activity would be generated in real time to help the PBOC maintain the stability of the value of the yuan and regulate boom and bust cycles of economic activity more effectively, damping the risk of credit bubbles in the financial system, analysts argued.

The revised proposal in April for Facebook’s planned digital currency, Libra, to include embedded supervision highlights the need to give up on a fully decentralised design to have a chance of winning regulatory approval.

Authorities around the world are concerned that Libra would leverage Facebook’s massive user base, resulting in the creation of a de facto global private central bank and reduce the monetary autonomy of existing central banks, said Raphael Auer, principal economist in the monetary and economic department of the Bank for International Settlements.

Instead of a single token based on a basket of currencies introduced in its initial white paper, Libra’s revised proposal will create multiple units tied to existing currencies such as the US dollar or the euro, which can blend in much easier in domestic monetary, financial and regulatory frameworks, and do not pose direct threats to monetary autonomy, Teunis Brosens, lead economist for digital finance and regulation at ING Bank said.

How is China’s sovereign digital currency different from a cryptocurrency like bitcoin?
Loading spinner

Leave a Reply

Scroll to top