As both are products of blockchain, what is the difference between digital RMB and Bitcoin?

Original title: China's Digital Yuan vs Bitcoin

Source: Decrypt

Author: Ekin Genç

Compiled and edited by Chen Zou

China has the most advanced central bank digital currency project of any major economy. But how is the digital yuan different from Bitcoin, or cryptocurrencies in general?

Among the world’s major economies, China is the closest to adopting a full-fledged central bank digital currency (CBDC). Like Bitcoin, one of the many visions of the digital yuan is to facilitate digital peer-to-peer payments.

It differs in that it is controlled by a central authority rather than relying on a decentralized ledger.

Today, more than 80 governments around the world, representing 90% of global GDP, are exploring or experimenting with central bank digital currencies (CBDCs). As of July 2021, only five countries have launched CBDCs. They are all Caribbean island nations: the Bahamas, Saint Kitts and Nevis, Antigua and Barbuda, Saint Lucia, and Grenada.

Of all the major economies, China’s digital yuan, also known as e-RMB or digital currency, electronic payment (DCEP), is the furthest along in building a fully fledged CBDC.

First, let’s explain what the digital RMB is, and how it differs from and compares to the original cryptocurrency, Bitcoin.

What is digital RMB?

CBDC is a digital currency managed by the state. In the case of China, its CBDC is a digital version of its currency, the digital yuan. CBDC is similar to a stablecoin, which is tied to a specific fiat currency at a 1:1 ratio.

The digital yuan is therefore effectively the digital equivalent of China’s physical currency: you hold fiat money digitally in your mobile wallet, rather than as physical paper money in your pocket. Every physical banknote printed by the central bank has a unique identifier, so every digital yuan token issued has the same identifier.

Unlike cryptocurrencies, CBDCs are usually not based on a decentralized blockchain, as the central bank has clear ownership of the ledger. But more on that later.

Starting in October 2020, the People's Bank of China (PBoC) has airdropped millions of digital yuan to Chinese citizens as part of testing the technology and creating a flurry of activity around it. This summer's CBDC activity is still ongoing. Chinese citizens can already spend digital yuan in a growing number of stores across the country, including Walmart.

In fact, according to a July 2021 progress report from the People’s Bank of China, the digital yuan has been used in 70.75 million transactions so far, with a total value of 34.5 billion yuan ($5 billion) by the end of June.

The next agenda for the digital yuan is a large-scale promotion during the 2022 Winter Olympics in Beijing in February. This promotion will include foreign tourists.

But bitcoin-friendly Sen. Cynthia Lummis and her colleague Sen. Marsha Blackburn, R-MS, have asked the U.S. Olympic and Paralympic Committee to block athletes from using the digital yuan because it “could be used to monitor Chinese citizens and those visiting China on an unprecedented scale.”

Why does China need a digital currency?

Fan Yifei, deputy governor of the People's Bank of China, explained in an April 2020 article in the media outlet Global Times that physical currency is expensive to print and maintain, easy to counterfeit, and its anonymity means it can be used for illegal purposes. The digital yuan will completely overcome these problems.

It stands to reason that reducing the anonymity of cash is the main driving force behind the project.

Yao Qian, former director of the People’s Bank of China’s Digital Currency Research Institute, said in May that the bank does not intend to monitor all transactions in real time.

The government has deployed millions of facial recognition cameras across the country to track any incidents. The digital yuan can be smoothly integrated into this surveillance infrastructure; for example, if some lawbreakers commit crimes under camera surveillance, their wallets will be immediately frozen or the balance will be deducted.

The United States still maintains its usual conspiracy theory tone. Matt Pottinger, former deputy national security adviser of the United States, pointed out in an interview with Bloomberg in April this year that the digital RMB can be used as a financial weapon. "This currency can be manipulated like a light switch. The Chinese government can block transactions to a company's wallet and delete it from the digital RMB application."

What is the difference between Bitcoin and digital yuan?

China has repeatedly hinted at incorporating many blockchain-related buzzwords into its digital yuan. But decentralization is not a word on the list, apparently.

Both Bitcoin and the digital yuan facilitate digital peer-to-peer payments. That’s where the similarities end.

Bitcoin is able to do this because it is built on the blockchain, eliminating the problem of duplicate spending, and the digital yuan is able to do this because it functions more like direct cash and less like the traditional financial system that is currently hidden behind virtual apps.

This is undoubtedly a big problem in China, as 84% ​​of the Chinese population are already accustomed to using mobile wallets, while in comparison, only 41% of Americans use digital wallets like Apple Wallet.

What Chinese Citizens Really Think About Their Digital Currency

After years of rumors and speculation, China’s digital yuan has officially arrived, according to a recent article published in the People’s Daily.

In China, WeChat Pay and Alipay account for about 90% of China's $35 trillion mobile payments market, according to Bloomberg Intelligence. But these wallets need to be connected to private financial intermediaries such as banks. The digital yuan obviously changes this.

Bitcoin is decentralized and has no central authority. In contrast, the digital RMB is built on a structure called "one currency, two banks, and three centers," which refer to: one currency - the RMB; two banks - the People's Bank of China and commercial banks; and three centers - the identification center, the record center, and the big data analysis center.

Bitcoin's public ledger means that transactions are traceable, but pseudonymous. According to the principle of "controllable anonymity" of digital currency, digital RMB transactions will be traceable by the government: if the government wishes, it can terminate the anonymity of users in special circumstances.

Bitcoin is widely used as a store of value and a transaction asset. The digital yuan will just be an everyday currency. It is controlled by the government like other fiat currencies to ensure that its price is pegged to the national currency on a 1:1 basis, so that it does not give traders arbitrage opportunities or investors a reason to hoard.

What does the digital RMB mean to Bitcoin, or cryptocurrency?

Bitcoin has never been adopted as a medium of exchange, and its trading has been strictly restricted in China since 2017. But China has historically been home to the largest share of the world’s bitcoin miners, as high as 75.5% in September 2019, thanks to cheap electricity.

In May 2021, the Chinese government said it needed to crack down on Bitcoin mining and trading to "prevent and control financial risks." Of course, this rationale also coincides with the long-term goal of launching a digital yuan.

In April 2021, the global share of Chinese miners had already fallen to 46%, suggesting that the process of cleaning up Bitcoin had already begun before the government began to crack down in earnest. According to one mining analyst, as Chinese provinces including Yunnan, Anhui and Qinghai banned Bitcoin mining (allegedly in an effort to reduce China’s carbon emissions), all domestic mining activities came to a complete standstill as of June 2021.

In the crackdown, the central bank also issued a directive to payment platforms and banks to halt cryptocurrency trading activities, while instructing institutions to stop servicing cryptocurrency exchanges and over-the-counter (OTC) platforms.

But thanks to its core features, such as immutability and decentralization, Bitcoin is largely censorship-resistant. While China’s recent crackdown has caused Bitcoin’s hash rate to drop sharply (along with its price), the impact is likely to be temporary. Chinese miners are rapidly relocating to new locations, and Bitcoin’s hash rate has slowly begun to recover.

In the long run, China’s purpose in launching the digital yuan has nothing to do with Bitcoin. Its real goal will be to compete for the dollar’s ​​shaky global dominance.