The Chinese government has recently begun testing its new official digital currency, unofficially dubbed as the “Digital Currency Electronic Payment, DC/EP.” While it has not been officially released yet, pilot tests are being carried out in four major cities across China. The official release of this digital currency, which could become the first Central Bank Digital Currency (CBDC) in the world if it is issued by the state bank, People’s Bank of China, is anticipated to occur later in 2020.
Projections for China’s Digital Currency
The potential size of China’s digital currency could amount to one trillion yuan (approximately $140 billion USD), which would equate to about one-eighth of the nation’s cash flow. Considering the broader implications, this significant venture into the digital currency domain can transform the Chinese economy and potentially set a precedent for other countries.
Understanding Digital Currency
A digital currency is an electronic form of payment that has no tangible existence. It can be transferred between users or entities using technology such as computers, smartphones and internet. Despite its resemblance to physical currencies, digital money offers borderless transfer of ownership and instant transactions. This type of currency, also referred to as digital money or cybercash, can include cryptocurrencies.
Cryptocurrency Explained
Cryptocurrencies are digital or virtual currencies that employ cryptography for enhanced security. They utilize decentralized technology to enable users to make secured payments and store money without revealing their identities or going through a traditional banking system. All transactions are recorded on a distributed public ledger known as a blockchain, which is updated and maintained by currency holders. Some widely recognized cryptocurrencies include Bitcoin, Libra, Ethereum, Ripple, and Litecoin.
India’s Stance on Digital Currency
The Reserve Bank of India (RBI) imposed a ban on cryptocurrencies in 2018, identifying them as unstable units of account due to their frequent and sharp fluctuations in value. The RBI also raised concerns regarding the potential risks that cryptocurrencies pose, including anti-money laundering and terrorism financing risks for the state, along with liquidity, credit, and operational risks for users.
However, the RBI has also mentioned it might consider developing a sovereign digital currency at an appropriate time. Recently, the RBI’s ban on financial institutions from facilitating deals in digital or cryptocurrencies was challenged by India’s Supreme Court. This legal intervention was initiated by the Internet & Mobile Association of India (IAMA), asserting that dealing and trading in cryptocurrency is a legitimate business activity. The IAMA further argued that the RBI does not have jurisdiction over cryptocurrencies as these assets could be classified as commodities rather than currencies.
Last Modified: February 7, 2024