Is China’s Digital Currency Blockchain-Powered or Not?

Posted on Aug 2, 2021 | BLOG


This year’s Summer Olympics in Japan may feature some world firsts, but Beijing’s Winter Olympics in 2022 is setting records already. 

The Chinese central bank has announced that it will be allowing visitors to use its new digital currency, called the digital yuan (e-yuan) or digital renminbi to make purchases during the Winter Games. They will even be selling wearable gadgets that let consumers make payments without relying upon their smartphones. 

While it is positive to see new developments in the digital currency space, the e-yuan is a bit of an oddity compared to traditional cryptocurrency projects and deserves a bit of a breakdown. 

The E-Yuan Is a Central Bank Digital Currency 

Unlike many other countries, digital currencies have been on China’s radar for some time. The Chinese central bank has been developing the Digital Currency Electronic Payment (DCEP) system since as early as 2014. 

However, efforts to build the DCEP took off when Facebook announced its new Libra project. Libra seems to have raised concerns in Beijing that large private entities may issue currencies outside of the Chinese government’s control. Thus, the e-yuan was born. 

How the E-Yuan Is Different

The e-yuan is a little bit different from cryptocurrencies like Ethereum or Bitcoin. Instead of operating on a decentralized blockchain, the e-yuan is a centrally-controlled digital currency. These kinds of digital assets are called Central Bank Digital Currencies (CBDCs). 

Although it is not decentralized, the e-yuan does use asymmetric cryptography to secure against bad actors. The e-yuan is backed 1:1 by real physical yuan, which underpins its value. 

The e-yuan is centralized, meaning that it doesn’t rely upon blockchain technology. It can’t distribute itself via mining like Bitcoin does, which means that a new system is needed. 

The e-yuan uses a “two-layer” distribution system. The central bank distributes supplies of e-yuan to commercial banks. The commercial banks then distribute supplies of e-yuan to their customers. The government is also considering allowing people to exchange cash for e-yuan at commercial banks. 

Although the Chinese government has indicated that it will be possible to spend e-yuan with wearable technologies, at the moment it looks like early adopters will require a mobile phone app. Apps like WeChat and Alipay are popular payment methods in China, so Chinese citizens are already comfortable with spending via mobile app. 

Why Is China Creating the E-Yuan? 

The main reason that China is putting so much energy into its CBDC is monetary sovereignty. The Chinese government has long been concerned that digital assets like cryptocurrencies represent an unacceptable risk to its control over the economy. Additionally, the existing digital payment apps, WeChat and AliPay, are owned by private entities, not the government. 

By moving fast on the e-yuan, the Chinese government can bring digital payments under its control and ensure that its strict capital controls remain in place. 

It also gives the Chinese government a new tool with which to express soft power. If the e-yuan is simple to use, other countries may adopt it – particularly those deeply involved in China’s Belt And Road Initiative. Adoption of the e-yuan would expand China’s influence in these countries. 

Why Is the E-Yuan Controversial? 

As with anything Chinese, the e-yuan is not without controversy. There have been concerns from the European Central Bank (ECB) that the e-yuan is a threat to the Euro and to Europe’s monetary sovereignty generally. 

The US government has echoed these concerns and the Biden administration has begun studying the potential impact of the e-yuan on the value of the US dollar. 

There are also some human rights concerns. Physical cash remains one of the few ways that Chinese citizens can avoid government scrutiny. 

By eliminating cash in favor of a directly controlled currency, the Chinese government would have access to a detailed breakdown of how and where their citizens are sending their money. It could also give the government the ability to lock out bank accounts of citizens that it deems high-risk or dangerous. 

The E-Yuan Is Just the Beginning 

China is a first-mover but other governments are already considering their own CBDCs. The United Kingdom and Israel are both exploring their options to create 1:1-backed versions of their fiat currencies and others may soon follow suit. 

Whether these developments turn out to be positive or negative is a question for the future.