What Backs Digital Yuan?

Unlike other digital currencies, the digital Yuan is a legal tender in China, exclusively created and controlled by the People's Bank of China.

Digital Yuan has been under development for about seven years, and the government has already rolled it out across 21 cities in China. The PBOC has stipulated that 21 commercial banks and two online banks provide wallet and crypto exchange services for digital Yuan. It will serve as an alternative means of payment for goods and services. You can always start your trading journey of Digital Yuan at yuanpaygroup

The Backing of Digital Yuan

The digital Yuan is an electronic or virtual version of China's national currency, the Yuan. Unlike other cryptocurrencies that do not have underlying assets, the Chinese government uses Yuan deposits held by its Central Bank to back the digital Yuan. The PBOC requires the banks mentioned above to convert their Yuan holdings into digital tokens and then distribute them to merchants through mobile technology.

The backing is the digital Yuan with Yuan gives the former more stability than other cryptocurrencies. It allows the government to implement strict monetary controls and regulations to prevent the digital Yuan from losing substantial value even when the markets experience turmoil. Besides, it also facilitates more liquidity since investors can quickly convert their digital Yuan holdings into Yuan or cash whenever they need.

The direct ties between digital Yuan and Yuan could be a risk to traders and investors who rely on virtual assets' high volatility to generate profits. Digital Yuan has a centralized system that gives the Chinese government exclusive rights and powers to control its supply, circulation, and usage in the economy. For example, the digital Yuan is currently unavailable to traders on crypto exchanges. Meanwhile, Chinese citizens interested in using digital Yuan can exchange their cash for tokens at the selected traditional and online banks.

On the other hand, backing the digital Yuan with Yuan could also be an advantage to the Chinese government. Statistics show the USD accounts for about 84% of all international trade settlements while the Chinese Yuan holds only about 4%. Introducing a virtual version of its national currency would help fast-track international settlements, elevating its popularity among global traders and investors.

The Chinese government's decision to back the digital Yuan with Yuan is a strategic move that will help to position its national currency in the international reserve status. It significantly increases Yuan's attractiveness as a store of value and a transaction currency internationally, challenging the USD's position as the world's reserve currency.

Comparing Digital Yuan and Other Cryptocurrencies

Digital Yuan is also a cryptocurrency like virtual tokens such as Bitcoin and Ethereum. However, it has significant disparities with other cryptocurrencies. Apart from having an underlying asset, the digital Yuan is also centralized. The Chinese government controls the digital Yuan's supply and usage in its economy compared to decentralized digital currencies.

The PBOC currently restricts digital Yuan transactions in the Chinese economy. Users must sign up on the Yuan pay app with their Chinese identity cards. Even the app is only available in Chinese. That makes it easier for the Chinese government to supervise and control all digital Yuan transactions strictly. It eliminates the enhanced anonymity and privacy that users enjoy with other cryptocurrencies.

The Chinese national currency, Yuan, is the underlying asset that backs the digital Yuan. While that makes it unique from other virtual currencies, the backing of the Yuan gives the latter better price stability and liquidity than other cryptocurrencies.