While crypto is heating up around the world, the seeming arrival of China’s digital yuan could be a watershed moment for the crypto space. Bitcoin, the most known and decentralized digital currency, has a strong competitor: the Chinese government-backed digital yuan. While Bitcoin is run on a decentralized network, the digital yuan is a Central Bank Digital Currency (CBDC) overseen by the Chinese government. What this dynamic does is create a pretty compelling implication surrounding the overall cryptocurrency market, as well as the balance of power relating to this digital finance ecosystem.
The modern forms of cryptocurrency are based on security and the processing of transactions and the creation of new units using cryptography. For example, BTCS uses platforms such as Binance to allow people to purchase, sell, or trade cryptocurrencies such as Bitcoin.
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Now, let’s analyze how China’s new digital yuan may usurp global Bitcoin dominance, and what it all might mean for the future of digital currency.
1. Centralized vs. Decentralized: Two Competing Financial Models
The biggest difference between Bitcoin and China’s digital yuan is structure and purpose. For instance, Bitcoin is decentralized — no central authority is managing it. A transparent, permissionless financial system is created in which transactions are verified by a network of users. The decentralization appeals to those who want privacy, autonomy and don’t want to be attached to government regulations or traditional banks.
In contrast, China’s digital yuan, is centrally available and under the control of the People’s Bank of China (PBoC). The design is intended to allow the Chinese government to control its currency in a digital form so it can monitor transactions, and enforce regulations, and even limit the way the currency is used.
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The digital yuan boasts the stability and security of a government-backed currency but to the detriment of Bitcoin’s teethed decentralization. However, a fundamental difference between the two currencies is that one is exclusively designed for that purpose while the other is intended to be an all encompassing digital currency, which attracts very different users, yet the fact remains that the digital yuan was designed to appeal to those that place great value on stability as appose to privacy.
2. Speed, Efficiency and Cost Effectiveness
One of the main benefits of the digital yuan is its ability to make transactions simpler and more straightforward. Because the digital yuan is issued and handled by the PBoC, its transactions do not need to go through third party financial intermediaries once they are up and running, thus lowering transaction costs and improving efficiency. Unlike Bitcoin, where you can pay significant transaction fees in high periods, the digital yuan should cost less and pay faster.
Such a streamlined process could attract both Chinese citizens, as well as its partners to trade in China. As the digital yuan is adopted as a common payment option in cross border transactions, particularly in China’s Belt and Road Initiative regions, it seeks to compete directly with Bitcoin as the currency of choice favoured for fast, international, and low cost sending of money.
3. Government Backing and Regulatory Support
The digital yuan is a state backed digital currency that enjoys full government support and regulation, giving it a level of credibility and legitimacy that Bitcoin does not have in many countries. China, for example, has shown extreme strictness when it comes to private cryptocurrency because crypto trading platforms have been banned within China’s borders, and communication with foreign exchanges has been limited to its citizens. In a strict regulatory environment such as China, Bitcoin’s growth is boxed while the digital yuan could blossom hand in glove with state sanction.
Unlike other national currencies, the digital yuan would have this advantage, and for risk averse people and large organizations, this would certainly make it more attractive because they don’t really want to work with decentralized currencies because of the regulatory uncertainties. Multiple countries have cracked down on Bitcoin’s decentralized nature due to various government sanctions, tax regulations and restrictions that may hinder it from becoming mainstream in some areas. Instead, China’s backing of its digital yuan could bring it into the country’s financial and social systems as an alternative digital currency with official imprimatur and legal cover.
4. Cross-Border Influence and Economic Strategy
China’s digital yuan could also go beyond domestic use. By encouraging countries dependent on its economic support to adopt the digital yuan, China could see international growth that sees its currency rival the U.S. dollar for global influence. It could prevent Bitcoin from becoming a global payment currency and digital asset.
Beyond introducing the digital yuan into emerging markets, it could also appeal to nations that want to avoid the traditional, dollar-centric financial system. If China’s digital yuan does take the globe by storm, promoting cross border transactions, it would be carving out a big space in a global financial ecosystem and competing against Bitcoin and even the U.S. dollar.
5. Privacy and Control: And Public Perception
Privacy is one area where the digital yuan is challenged. One of Bitcoin’s greatest attractions is the decentralization, giving users a level of anonymity. Bitcoin transactions are recorded on a public blockchain but instead of revealing users’ personal information, these are identified with cryptographic addresses.
In contrast, the Chinese government has significant control of the digital yuan and controls transactions on an individual level making it a subject of privacy and surveillance concerns. Digital yuan transactions can be logged by the government and linked to a user identity. Bitcoin is more attractive to those who care about privacy. However, the ability to trace chronologically and geographically on the digital yuan poses no issue for those who aren’t bothered with privacy.
As a final analysis, the competition between Bitcoin and the digital yuan will ultimately help determine the course of global finance and, thereby, what form digital currency adoption will take for individuals, businesses and governments alike. With digital currencies now a rapidly growing part of the world, Bitcoin and the digital yuan contrastingly present different benefits and challenges that will define the space for some time to come.