- China has become the first major economy to roll out a digital currency.
- The e-yuan will bypass the global financial system.
- Economists, however, warn it could endanger the US dollar long-term.
- See more stories on Insider’s business page.
The People’s Republic of China (PBOC) introduced its first blockchain-powered digital currency controlled by its central bank, The Wall Street Journal first reported. The project took seven years to complete since work began in 2014.
The e-yuan is a government-sponsored virtual currency designed to trace all movements of money. For example, the state will know full details about what someone purchased and where, FXStreet reported.
It is money that isn’t associated with the global financial system, where the US dollar has dominated since World War II. Its main aim is to gain more centralized control and replace some of the cash and coins in circulation, CNBC reported. It is also a faster and cheaper way to make domestic and international transactions.
Up to 750,000 people have been chosen by a lottery system, allowing them to spend their digital yuan in both offline and online stores using an app, per the Journal. Food and drink giants including Starbucks and McDonald’s reportedly moved quickly to accept the new currency.
China is the second country and first major economy to roll out a digital currency. The first country was the Bahamas Central Bank, according to Bloomberg.
Distribution of the digital yuan will involve a two-tiered system. It will be dispensed to commercial banks who will then be responsible for getting the currency into consumers’ hands, CNBC reports.
PBOC also suggested the two-tier structure can “avert disintermediation in the financial sector” because the central bank will not be in competition with the commercial banks, per CNBC.
The virtual currency is held in cyberspace. It is available on a card, or an individuals’ mobile phone screen with a picture of Mao Zedong, mirroring the paper money. Spending doesn’t require an internet connection.
Support for the digital yuan is not unanimous as some think it could potentially threaten the future of the US dollar, MarketWatch suggested.
John Lipsky, a former International Monetary Fund staffer, told The Wall Street Journal: “Anything that threatens the dollar is a national-security issue. This threatens the dollar over the long term,” in a feature that described the virtual yuan as “a re-imagination of money that could shake a pillar of American power.”
Does this mean there is a digital dollar on the way?
Jerome Powell, the federal reserve chairman, thinks so, telling Congress that it is looking carefully at issuing one. It is now a “high-priority project for us,” he said.