China has been the frontrunner in implementing a Central Bank Digital Currency (‘CBDC’) for retail use within its markets and it has taken an aggressive strategy to advance its digital payments network. Recently, it was reported that China has introduced a pilot of their CBDC, the digital Yuan, amongst consumers in the Shenzhen district to be tested with app. 3,000 retail market players. China has also been involved in robustly evolving the legal basis for its digital payments ecosystem. In taking China’s vision for a retail CBDC one step forward, the People’s Bank of China on October 23, 2020, released a revised draft version of People’s Bank of China Law (‘Draft Law’) which is currently open for consultation. The Draft Law will mark the first comprehensive step establishing the digital currency as legal tender in China. Article 19 of the Draft Law recognises digital Yuan to be legal tender and Article 22 further restricts it to be the only officially recognised digital token, which has Yuan or Renminbi (China’s official currency) as an underlying value. Article 22 of the Draft Law states “No unit or individual is allowed to make or sell tokens, coupons and digital tokens to replace RMB in circulation in the market”. This essentially means that any stablecoins which are pinned with the Renminbi will not hold legal value in China, hence, correspondingly reducing competition with global stablecoins such as Facebook’s Libra. If taken a broad interpretation of Article 22, one may argue that the law is prescribed to ban or restrict the circulation of all crypto-asset other than the official digital currency issued by the Bank of China, the digital Yuan.
China’s aim is to establish an international ground in the competitive digital currency economy by transferring the expansion of digital finance to only state-controlled organisations, by strengthening the value of the Yuan to serve as a global reserve, both digitally and physically. However, China is also virtually limiting the scope of issuance of other crypto-assets or stablecoins by prescribing potential criminal prosecution for any violation of Article 22. This would in turn dissuade any retailers to accept digital tokens which are not state-backed and limit the competition to only Chinese issued stablecoins or other forms of crypto-assets.
This will be the first time that the digital Yuan has been defined within China’s currency system. It is most likely that online digital wallets in China would soon reprogram to provide the digital Yuan as a mode of retail payments. It is also argued that severe central bank enforcement would be required to regulate the digital currency in order to eliminate any breaches of privacy, security, and also to make sure that the underprivileged classes have access to the digital currency.
Authored by Shivani Agarwal and Samaksh Khanna.
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