What does China's Digital Yuan mean for Bitcoin?

Just when you thought the war between hard currencies and digital currencies, like Bitcoin, couldn’t get any more interesting, China released its Digital Yuan. Although China’s not going to replace its fiat currency with the Digital Yuan completely, it’s too soon to tell as trials are still going on with central banks, like the People’s Bank of China, leading the operation.

What is the Digital Yuan?

Officially known as a Digital Currency Electronic Payment (DCEP), China wants to replace its fiat currency with the digital one to encourage cashless transactions, ushering in a new era for world economics. Like Bitcoin, it also relies on blockchain technology to facilitate and verify transactions, but unlike Bitcoin, it is centrally controlled by regulatory authorities and backed up by fiat currency reserves.

How does it Affect Bitcoin?

China has a somewhat unclear relationship with the popular cryptocurrency Bitcoin. China still accounts for more than half of Bitcoin mining, but recently the government has led a crackdown in China’s mining hub, Inner Mongolia. The reason stated was concerns related to the climate as bitcoin mining requires tremendous amounts of energy to run Application-Specific Integrated Circuits (ASICs) – computers that solve complex cryptographic mathematical problems part of the verification process in the blockchain. Even before that, initial coin offerings (ICOs) for many cryptocurrencies, like Ethereum, were also banned. This leads many to believe that the world’s second-largest economy is moving towards banning cryptocurrencies altogether.

Why does China want to Ban Bitcoin?

The reason is simple. China has no control over Bitcoin as its decentralized nature provides the currency bearer with anonymity. This has raised widespread concern amongst the communist party as it means to trade in Bitcoin can hide money laundering and sponsor criminal activities against the state. If looking for bitcoin trading then you can visit YuanPay Group.

Not just a way for countering the growth of Bitcoin, the Digital Yuan brings many advantages to the Chinese government instead of issuing its fiat currency, as hard cash is difficult to track and can be counterfeited. The digital nature of the currency enables the government to follow money trails and prevent financial criminals’ counterfeiting efforts. But, does this not give the Chinese government undue rights to monitor all financial transactions? Yes, but the government has assured bearers’ anonymity will remain intact as long as they don’t commit any financial crimes.

A large population of China has already adopted cashless payment options like WeChat pay and Alipay. The digital Yuan can integrate with these pre-existing systems, leading to mass adoption by the public quickly. It even encourages China’s rural population, which has limited access to banking services, to participate in the economy as Digital currencies are much more versatile. Ethereum’s decentralized applications (DAPPs) are a testament to this fact, providing banking services on its blockchain to users who don’t even have bank accounts.

Similarly, on an international level, China aims to make the Yuan the main currency of trade due to uncertainties surrounding the US dollar’s stability, the current preferred currency of exchange at the international scale. China’s introduction of the Digital Yuan aims to attract many international traders due to its ease of use, time-saving, and no third-party currency requirements.

What Does the Future Hold for Bitcoin?

It’s too soon to tell how the price of Bitcoin gets affected as it depends on the success in the adoption of the Digital Yuan. If the currency gains traction, many other countries may follow suit and introduce their currencies, ushering in an era of Central Bank Digital Currencies (CBDCs). And, like China, may soon start introducing policies to ban or limit cryptocurrency usage. For now, we’ll have to wait and see how the Digital Yuan performs domestically against local token-based payment methods before saying with certainty about what the future holds for Bitcoin.