People’s Bank of China (PBoC) Claims Its Digital Yuan (DC/EP) Won’t Cause Inflation

China has been at the forefront of the Central Bank Issued Digital Currency (CBDC) race, as it started its research for the same almost 5 years ago and it has been speculated since last quarter of 2019, that they might release the digital Yuan sooner than later. A recent report from the local media also suggested that the government has already started the testing of digital Yuan in 4 cities namely Shenzhen, Suzhou, Xiongan new area, and Chengdu as a form of travel subsidies for the workers.

A bank representative confirmed the pilot program being carried out in the named four cities during a tv appearance, but also claimed that the pilot program should not be seen as an official launch of the DCEP for public use. The bank representative said,

“The current closed test of digital Yuan will not affect the commercial operation of listed institutions, nor will it affect the RMB issuance and circulation system, financial market and social economy outside the test environment.”

The Concerns Over Inflation

The issuing of digital yuan to the enterprises and banks also raised concerns over inflation, but the bank assured there would be no issues of inflation as any enterprise would be required to pay 100% of the reserve for the digital yuan they would acquire. In order to make sure that there is no inconsistency, the central bank of China would first avail the digital yuan to other banks and financial institutions, and then enterprises and business owners can access it from these financial institutions.

The two-layer architectural design of the digital yuan makes it quite similar to the paper yuan as it has been designed to work offline in case of any network shutdown or poor connection. The first layers aid the common internet-based banking services while the second layer has been specifically designed to help it function even in case of being offline. The bank explained,

“In the absence of a network, as long as two mobile phones equipped with a DC / EP digital wallet are touched, the transfer or payment function can be realized.”

The bank also claimed that the digital yuan won’t be tied to any bank account and the traditional banking system won’t have any authority over the DC/EP network. The bank further claimed that national digital currencies would bear limited similarities to the traditional cryptocurrencies and since it would be backed by the country’s credit system, it would be much more stable than the likes of Bitcoin and other decentralized digital assets.

While only time would tell how efficient the new digital yuan would be, but many speculate that the digital yuan won’t be decentralized and the main purpose of its issuance is to have better control over the circulation and flow of money from and outside china.

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