What is China's digital currency? Will its issuance trigger inflation?
TechFlow Selected TechFlow Selected
What is China's digital currency? Will its issuance trigger inflation?
Central bank digital currency does not accrue interest and can be used for small-value, retail, high-frequency scenarios, with no difference compared to paper money.
Navigating Web3 tides with focused insightsRecently, progress in the development of China's legal digital currency has attracted widespread public attention. A spokesperson from the People's Bank of China (PBOC) Digital Currency Research Institute recently stated that the development of digital RMB is steadily advancing. It is currently undergoing internal closed pilot testing in Shenzhen, Suzhou, Xiong'an New Area, Chengdu, and future Winter Olympics scenarios, with the aim of continuously optimizing and improving its functions.
The PBOC began researching legal digital currencies in 2014. According to the institute’s spokesperson, work on the digital RMB is progressing steadily. The digital RMB system has largely completed top-level design, standard setting, functional development, and joint debugging tests under the principles of a two-tier operation mechanism, substitution for cash in circulation (M0), and controllable anonymity. The project follows the principles of being steady, secure, controllable, innovative, and practical.
The spokesperson emphasized that the DC/EP information circulating online at present relates to technical testing during the research and development process and does not indicate the official launch or issuance of the digital RMB. The current closed testing will not affect the commercial operations of financial institutions, nor will it impact the RMB issuance and circulation system, financial markets, or socioeconomic activities outside the test environment.
What is China's digital currency? How does it work?
Simply put, the PBOC's digital currency is an electronic version of the RMB. When people hear "digital currency," their first thought might be Bitcoin or Facebook's proposed Libra.
However, unlike these so-called digital currencies, the digital currency to be issued by China's central bank is backed by national credit and can be considered an electronic form of the RMB. Therefore, the central bank's digital currency has legal tender status.
More importantly, backed by the state, the central bank's digital currency will have greater value stability. In contrast, so-called virtual currencies like Bitcoin cannot guarantee stable value, making users vulnerable to speculative losses ("getting reaped").
In terms of usage scenarios, the digital RMB does not accrue interest and is suitable for small-value, retail, high-frequency transactions—functionally no different from physical cash. At the same time, its use must comply with existing regulations regarding cash management, anti-money laundering, and counter-terrorism financing.
What are the benefits of digital RMB?
Lower issuance costs, more convenient transactions...
According to seasoned industry insiders, payment, transaction, and anti-money laundering management based on physical RMB cash is becoming increasingly difficult and costly in modern society. The issuance of a digital currency could effectively address these issues.
Moreover, China's digital currency does not require binding to any bank account, freeing it from the constraints of the traditional banking system.
Additionally, when network signals are poor, online banking and payment platforms often become unusable. However, DC/EP's dual offline technology ensures functionality even in extreme conditions—just like using paper money. For example, without a network connection, two smartphones equipped with DC/EP digital wallets can transfer funds or make payments simply by tapping each other.
Will issuing a digital currency trigger inflation?
It will replace existing currency on a one-to-one basis and will not devalue the money supply.
The central bank's digital currency starts by replacing physical cash and coins in circulation. If there is currently 100 yuan in circulation, the digital RMB will replace that amount equivalently.
To ensure that digital currency is not over-issued, commercial institutions must pay 100% full reserves to the central bank. That is, during issuance, the PBOC first exchanges the digital currency with banks or other operating institutions, which then distribute it to the public.
Furthermore, considering that digital currency will initially be limited to pilot programs, it will not be widely issued or fully rolled out in the short term, and the velocity of money will remain at normal levels.
Therefore, digital currency will not cause inflation.
Join TechFlow official community to stay tuned
Telegram:https://t.me/TechFlowDaily
X (Twitter):https://x.com/TechFlowPost
X (Twitter) EN:https://x.com/BlockFlow_News
