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Digital Yuan of China: how e-CNY works

Home » Digital Yuan of China: how e-CNY works

Digital Yuan of China: how e-CNY works


The targets behind the Chinese digital yuan (or e-CNY) show that the “eastern dragon” wants to avoid the problems associated with cryptocurrencies. China is placing more emphasis on the blockchain technology behind them and ignoring assets such as bitcoin and ether.

Many governments around the world and central banks are working to create a decentralized currency that offers more options for currency holders. This article is an introduction to the digital yuan, an overview of its operation, and its impact on the Chinese economy.

What is the digital yuan?

The People’s Bank of China is one of the leaders in the field of CBDC (Central Bank Digital Currency) national digital currencies of central banks, the Bank of China is actively engaged in consistent research and development in the field of CBDC. He has been working on a study to identify the benefits of CBDC since 2014. With a first-mover advantage, the PBOC successfully launched its CBDC, digital yuan or e-CNY, in April 2022. Although the global pandemic in 2020 hampered the development of the project, it maintained a steady pace of overcoming health and financial hurdles.

China’s digital currency will be the first example of a national government’s approval of CBDC applications. As a result, many other countries have realized the need to stay ahead in the race for blockchain dominance. Let’s take a closer look at the prerequisites for the development of the digital yuan.

The Role of China in the Blockchain and Crypto Landscape

One robust approach to understanding the digital yuan cryptocurrency would focus on its backstory. China was one of the early leaders in the field of cryptocurrencies. There are many Chinese miners on the Bitcoin network who control a large proportion of the bitcoins available for mining. In addition, China has also become one of the largest centers of blockchain development, overtaking the United States.

However, the regulatory crackdown on cryptocurrencies in China has raised many doubts about the feasibility of CBDCs such as the digital yuan. In fact, China perceives blockchain technology as the best alternative to cryptocurrencies. China has imposed regulatory sanctions on cryptocurrencies that began with ICO investigations in 2017. In addition, the government of the country also forced miners and citizens to disclose information about their wealth stored abroad in cryptocurrencies.

China has put a revised focus on permissioned blockchain alongside bank-controlled digital currencies. All these initiatives have helped China set the tone for the development of its own CBDC, pushing the notable failures with crypto assets into the background. Many investors speculate that CBDCs could have favorable implications for cryptocurrencies. However, central bank digital currencies will only encourage the mass adoption of digital currencies, thereby opening up more people to crypto assets.

The beginning of the digital yuan

The definition of “what is the digital yuan” and China’s role in crypto and blockchain raise curiosity as to the origin of the digital yuan. The People’s Bank of China started work on a digital yuan in 2014 called the “Digital Currency Electronic Payment” or DCEP project. However, China’s intention to develop a new addition to the blockchain ecosystem remained classified for years.

Highlights of the digital yuan project gained prominence through public discussions of the project in 2019. Representatives of the People’s Bank of China expressed their opinion on the project, and he put up a competition for the Libra cryptocurrency on Facebook.

According to the governor of the PBOC, China’s digital currency will not serve as a new currency to replace the existing yuan. On the contrary, it will develop as a digital version of China’s existing monetary system. Governor Yi Gang also revealed that the new digital currency will focus on transactions and payments, which will support China’s growing digital economy.

China has registered huge growth in the e-commerce market, which has expanded with huge profits. Online shopping has increased at a huge markup during the global pandemic. In 2020, Chinese consumers appear to have purchased about $20.8 million worth of goods through e-commerce retail.

The PBOC Governor also noted that a detailed explanation of the impact of the digital yuan would highlight its flexibility to integrate into China’s mainstream economy. Yi Gang expressed a positive view on the use of the digital yuan to speed up the settlement of transactions in banks. At the same time, the digital yuan will not affect normal processes, such as deposits, which will rely on the standard yuan or currency.

The origin of the digital yuan also draws attention to China’s national blockchain strategy. President Xi Jinping announced the need for a strategic approach to implementing blockchain implementation plans. It is also reasonable to expect a favorable rate of adoption of the digital yuan cryptocurrency in almost all aspects of daily life.

Leading companies such as Alibaba and Tencent have taken the lead in digitalizing e-commerce and payments. On the other hand, China is also working to build a strong IoT infrastructure and smart cities. All of these factors behind the origin of the digital yuan prove that it is an important part of China’s long-term plan to fuel a digital and cashless society.

The work of the digital yuan

The statements of the governor of the People’s Bank of China clearly demonstrate the purpose of the digital yuan. However, it is also important to answer the question “how does the digital yuan work”, as well as to determine whether it resembles cryptocurrencies. In 2019, the application of blockchain technology in the management and use of the central bank has been focused on private blockchains.

Private blockchain networks are also called permissioned blockchains, which are private networks and are only accessible by nodes that are allowed to participate. In fact, a private or permissioned blockchain model is common in the CBDC field. If you look at developments in central bank digital currencies in other regions such as the EU and Russia, you will find that private blockchains are the underlying infrastructure.

The private blockchain approach is an important point in defining “what is the digital yuan” and its role as a CBDC. Central banks will opt for a blockchain-permitted approach as they do not want to publicly disclose sensitive financial information or transaction details. China has developed the Blockchain Service Network or BSN as a permissioned blockchain network where developers and organizations can develop digital assets and decentralized applications.

In theory, all third-party applications in the Blockchain Service Network (BSN) are decentralized. On the other hand, the “decentralization” element is questionable, since the Chinese government controls the BSN. However, the international version of BSN can provide users with the desired benefits of decentralization.

The work of the digital yuan explained the possibilities of adopting a unified CBDC development model. Some overseas projects have taken similar approaches to China’s global blockchain-based infrastructure.

The Blockchain Service Network integrated Hyperledger Fabric in July 2020, and many other public blockchain networks have followed suit. Some of the popular projects on BSN include Tezos, Ethereum, NEO, EOS, and Nervos. Other recent additions to BSN include Solana, Oasis, Polkadot, and Algorand. In addition, BSN also expects many other public blockchain networks to join in 2022.

Aside from decentralization concerns, the comparison between cryptocurrencies and the digital yuan also focuses on anonymity. Unlike cryptocurrencies, BSN will have full access to financial information about transactions and individuals using BSN services. Anonymity gives central banks a distinct advantage, as they do not have to deal with anonymous clients and the associated complexities.

The influence of the digital yuan

An explanation of the fundamentals of the digital yuan and its workings raises curiosity as to its impact. The digital yuan can offer significant benefits to users in accessing the benefits of the digital economy. However, the Chinese digital yuan will bring more benefits to the government and central banks.

For example, the Chinese government could track transactions more effectively, thus supporting the development of a socialist digital economy. Cash will remain a popular payment method. However, a growing number of users will gradually turn to the digital yuan to digitalize the Chinese economy. Here is a summary of the notable benefits of the digital yuan for the Chinese state and its citizens.

The efficiency of payment systems

The main impact of how the digital yuan works in fueling the digital economy will be reflected in the improvement of payment systems. The digital yuan has the ability to integrate into online payment systems, such as those developed by Alibaba and Tencent.

Both companies are likely to add RMB digital CBDC to Alipay and WeChat smartphone apps. Such initiatives could help simplify payment systems. With a dominant share of online transactions in China, these platforms can help the government track online payments.

Global acceptance of the digital yuan

The explained benefits of the digital yuan also highlight the opportunities for improving the position of the yuan on the global stage. Importantly, the US dollar was the preferred choice for money transfers and transaction settlements. About 88.3% of international transactions depend on the US dollar.

However, the pandemic has affected the value of the US dollar in 2020. Subsequently, the Fed’s decision to print more money also raises legitimate concerns. These factors could lead to monetary instability in the world’s largest economy. In the event of a collapse of the US dollar, the digital yuan could be a favorable alternative.


The introduction of China’s digital currency and its benefits prove its potential to usher in new milestones in China’s digital economy. As a central bank digital currency project, the digital yuan aims to speed up financial transactions while delivering efficiency. At the same time, the digital yuan can also open up financial services to more users. Most importantly, it could play a key role in China’s long-term plan for a cashless society.

Interestingly, the digital yuan also provides many benefits to the Chinese government and its central bank. For example, the ability to trace digital yuan transactions on BSN could provide government control over financial transactions. In addition, central banks will not have to deal with anonymous clients. Central banks do not need to think about action plans in case of volatility in the cryptocurrency markets with the digital yuan. Learn more about CBDCs and their future potential.


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