[Part 37] The Ambitions and Challenges of the Digital Yuan: Will China's CBDC Change the World?

Alice: "Hello, Mr. Rabbit! I've been hearing the term "Digital Yuan" a lot in the news lately, but what exactly is it? It sounds like such a huge topic, and it seems a bit difficult for me..."

Mr. Rabbit: "Hello there, Alice! You're full of energy today, as always! Hmm, "Digital Yuan", you say? That is exactly what the whole world is watching—it's the Central Bank Digital Currency (CBDC) that China is promoting. China's grand ambitions and how it might change our future... hehe, leave it to Mr. Rabbit, and even the most difficult topics become a breeze! Why don't we set off on an adventure into the mysterious world of the digital yuan today?"

Alice: "Wow! China's digital money? That sounds like it's on a huge scale! Yes, Mr. Rabbit, please lead the way!"

Mr. Rabbit: "That's the spirit, Alice! Let's take a close look at how the digital yuan is not just a new type of money, but something that could potentially impact the global economy and our daily lives!"

What Exactly Is the Digital Yuan? ~The Future Form of Money and Its True Nature~

Alice: "Mr. Rabbit, to begin with, I don't really understand what a "Central Bank Digital Currency (CBDC)" is..."

Mr. Rabbit: "Ah, let's start there! CBDC stands for Central Bank Digital Currency, and it refers to digital legal tender issued by a country's central bank (like the Bank of Japan in Japan). You can think of it as digital money whose value is guaranteed by the state, just like banknotes and coins."

Alice: "Oh! So the digital yuan is digital money issued by China's central bank! But is it different from electronic money like Suica or PayPay that we use every day?"

Mr. Rabbit: "Good question, Alice! That's an important point. Private electronic money like Suica or PayPay is a service provided by private companies, and it is backed by 'tangible money' such as bank deposits. However, a CBDC is a "liability" issued directly by the central bank. In other words, it is a digital version of 'real money' whose value is guaranteed by the central bank, just like banknotes. Therefore, it has the characteristic of being free from the bankruptcy risk of private companies."

Alice: "I see! A digital version of real money... that's amazing!"

The Form of the Digital Yuan ~Is It Called DCEP?~

Mr. Rabbit: "That's right. The digital yuan is also often called "DCEP (Digital Currency Electronic Payment)". This means 'Digital Currency Electronic Payment.' It aims to partially replace cash (banknotes and coins) and is being developed as a retail CBDC, meaning it is intended for use by ordinary people and shops for daily payments."

Alice: "Oh, so it's like cash becoming digital! How do you use it?"

Mr. Rabbit: "Basically, you use a dedicated smartphone app or wallet, similar to QR code payments. What's interesting is that it also envisions offline payments. In other words, technology is being developed that allows payments to be completed just by bringing smartphones close to each other, even without an internet connection. This might be useful in times of disaster, for example."

Alice: "It's convenient to be able to use it without the internet! But what about elderly people or those who don't have smartphones?"

Mr. Rabbit: "They seem to have thought about that, too. Card-type hardware wallets and usage on other devices are also being considered. Various measures are being taken so that more people can use it."

The Mechanism of the Digital Yuan ~Who Issues It and How?~

Alice: "How does that digital yuan reach our hands? Does the central bank distribute it directly?"

Mr. Rabbit: "That's another interesting part. The digital yuan is issued and circulated through a mechanism called a "two-tier system"."

Alice: "A, a two-tier system...?"

Rabbit-senpai: "Yes. First, as the primary layer, the People's Bank of China (that's China's central bank) issues the digital yuan to intermediary institutions such as designated commercial banks. Then, as the secondary layer, these intermediaries provide the digital yuan to us, the general users and businesses. So, it's not that the central bank distributes it directly to us, but rather that banks and others act as intermediaries."

Alice: "I see! It's a two-step process: from the central bank to the banks, and then from the banks to us. Why is it structured that way?"

Rabbit-senpai: "There are several reasons for that. First, it would be difficult for the central bank to manage billions of individual accounts all by itself. By leveraging the know-how and infrastructure of existing financial institutions, it can be popularized efficiently. Also, by maintaining the role of private financial institutions, the goal is to avoid sudden changes to the financial system."

Alice: "I see, I see. It would certainly be problematic if everything changed all at once. Technically speaking, does it use blockchain like Bitcoin?"

Rabbit-senpai: "Oh, Alice, you're sharp! Actually, blockchain technology is not used in every part of the digital yuan. While it might be utilized for some functions or experimental trials, it is considered to be based on a centralized management system. This is because they prioritize processing speed and scalability."

The Ambitions of the Digital Yuan: What is the Future China is Envisioning?

Alice: "The digital yuan feels like it was created very systematically... What exactly is China aiming for with this digital yuan?"

Rabbit-senpai: "That is exactly the core of the matter, Alice! It is said that the digital yuan embodies China's grand ambition. It has both domestic and international aspects."

Ambition 1: Internationalization of the Yuan and Challenging Dollar Hegemony

Rabbit-senpai: "First, as for its international ambition, it is to strongly promote the 'internationalization of the yuan'. Current global trade and financial transactions are mainly centered on the US dollar. This is called the dollar-based currency system, and it is a source of immense power for the United States."

Alice: "Does that mean the dollar is the strongest?"

Rabbit-senpai: "That's right. Most international remittance systems also rely on SWIFT (Society for Worldwide Interbank Financial Telecommunication), a network centered on Western countries. China wants to break through this dollar-centric system and raise the international status of the yuan. By using the digital yuan, direct cross-border payments might become possible without going through the SWIFT network. This could potentially be a move that relatively diminishes the influence of the United States."

Alice: "I see...! It's a tool for China to have more power in the world!"

Rabbit-senpai: "Exactly. In particular, if they introduce the digital yuan for trade settlements with participating countries in coordination with the 'Belt and Road' initiative proposed by China, building a new financial and economic sphere centered on China might not be just a dream. Furthermore, the digital yuan has the advantage of making it easier to promote the international use of the yuan in a controlled manner while maintaining capital controls."

Ambition 2: Complete Control and Efficiency of the Domestic Economy

Alice: "The international ambitions are impressive, but what are they aiming for domestically?"

Rabbit-senpai: "The domestic ambitions are also wide-ranging. First, there is improving access to financial services (financial inclusion). The goal is to make it easier to provide financial services to people who do not have bank accounts and to residents in rural areas through the digital yuan."

Alice: "So, as long as you have a smartphone, anyone might be able to use money!"

Rabbit-senpai: "And another important point is curbing the dominance of private companies in the domestic payment system. In China, private cashless payment services like Alipay and WeChat Pay have already become extremely widespread, and these private companies hold the majority of the public's payment data. The government has an intention to correct this situation slightly, grasp the flow of money more directly, and manage financial risks."

Alice: "Huh, it's convenient, but it's also a problem if private companies become too powerful, right?"

Rabbit-senpai: "That's right. Furthermore, by introducing the digital yuan, it is believed that improving the efficiency of payment systems, preventing counterfeit money, and tracking illegal activities such as tax evasion and money laundering will become easier. It is also expected to serve as a backup in case existing payment systems go down for any reason."

Ambition No. 3: Securing Leadership in Next-Generation Technology

Rabbit-senpai: "And we must not forget the ambition to take the lead in setting international rules in the new technological field of CBDCs. China is ahead of the world in conducting large-scale CBDC pilot programs. They want to gain first-mover advantage in this field and exert influence on future international standard-setting."

Alice: "Wow! So they want to be leaders not just in the world of money, but in the world of technology too!"

Challenges of the Digital Yuan: Is Realizing the Dream Not So Easy?

Alice: "But, Rabbit-senpai, the digital yuan sounds amazing, but aren't there any problems or difficulties with it?"

Rabbit-senpai: "Of course, Alice. Every grand plan comes with its own set of challenges. The digital yuan also has many hurdles to overcome."

Challenge No. 1: The Barrier to Adoption - Competition with Alipay and WeChat Pay

Rabbit-senpai: "The first major challenge is 'how to get the public to use it widely'. As I mentioned earlier, Alipay and WeChat Pay are already overwhelmingly popular in China. These services are extremely convenient and deeply rooted in the lives of the people."

Alice: "Even if something new comes along, if what we're using now is convenient, we might not want to switch."

Rabbit-senpai: "Exactly. The key will be whether the digital yuan can offer clear benefits to users compared to existing convenient payment methods. Even though the government is leading it, designing incentives to encourage people to use it will be important. In the beginning, they even held campaigns where they distributed digital yuan via lottery."

Challenge No. 2: Privacy Protection and Concerns About a Surveillance Society

Alice: "Also, if all money movements are recorded digitally... that feels a bit scary. Will it be known exactly who bought what?"

Rabbit-senpai: "Alice, that is a point of concern for many people. The digital yuan is said to aim for 'controllable anonymity'. In other words, the idea is to ensure a certain level of anonymity for daily small-amount transactions, while making it possible to track transactions suspected of fraud or high-value transactions."

Alice: "Controllable anonymity... that sounds complicated."

Rabbit-senpai: "Yes. But if the line between what is anonymous and what is tracked is unclear, or if the operation is opaque, people might feel anxious that they are 'constantly being watched.' Especially in a country like China, this balance between privacy protection and state surveillance becomes a very delicate issue."

Challenge No. 3: Impact on the Financial System

Rabbit-senpai: "And another potential challenge is the impact on the entire financial system. If many people convert their bank deposits into digital yuan, funds might flow out of banks, which could affect their lending functions. Some experts call this the risk of a digital bank run."

Alice: "So the banks might get into trouble."

Rabbit-senpai: "The People's Bank of China seems to be considering measures to address this, such as setting the interest rate on the digital yuan to zero or placing limits on holdings, but we need to carefully observe how it actually impacts the system."

Challenge 4: International Barriers - Hurdles to Global Adoption

Rabbit-senpai: "There are also mountains of challenges to overcome for it to be used internationally. First, how to overcome the differences in regulations and legal systems of each country. Then, how much the digital yuan can compete with the international trust and convenience that the US dollar has built up. Gaining international consensus won't be easy either."

Alice: "To get the world to use it, we'll need the cooperation of many different countries, won't we?"

Will the Digital Yuan Change the World? - Alice Predicts the Future

Alice: "Hmm, the digital yuan has amazing potential, but it also has so many challenges... In the end, will the digital yuan be able to change the world?"

Rabbit-senpai: "That is exactly the question the whole world is holding its breath to watch, Alice. Let's think about it from a few different perspectives."

Impact on the International Monetary System - Is the Era of Dollar Dominance Ending?

Rabbit-senpai: "If the digital yuan becomes widely used internationally, it could potentially bring changes to the long-standing international monetary system dominated by the US dollar. However, it's unlikely that the dollar will suddenly slide from its position as the reserve currency. The strength of the dollar is supported by various factors, not just the US economy, but also the reliability of its legal system and the depth of its financial markets."

Alice: "So it's difficult to replace the dollar right away."

Rabbit-senpai: "That's right. However, in specific regions, such as countries participating in the Belt and Road Initiative or countries with strong economic ties to China, it is possible that something like a 'digital yuan economic zone' could emerge where the digital yuan is used as a primary settlement currency. If that happens, the world's currency map might become more multipolar than it is now."

Impact on CBDC Development in Other Countries - The Future of Competition and Cooperation

Rabbit-senpai: "The trends in the digital yuan are undoubtedly having a major impact on CBDC development in other countries. Some countries are trying to learn from China's pioneering examples, while others are rushing their own CBDC development to compete with China. In other words, the CBDC development race is intensifying globally."

Alice: "Japan is also researching a digital yen, right!"

Rabbit-senpai: "That's right. The design philosophy and challenges of the digital yuan should be an important reference for Japan as it considers a digital yen. A key point to watch is what kind of CBDC each country aims for, and how the CBDCs of different countries will cooperate in the future."

Impact on Japan - Does It Concern Us?

Alice: "Rabbit-senpai, does the digital yuan have anything to do with us in Japan?"

Rabbit-senpai: "Of course, Alice. There are a few things to consider. First, in the future, inbound tourists, meaning travelers from China, might start using the digital yuan to shop within Japan. If that happens, Japanese stores might need to start supporting digital yuan payments."

Alice: "Wow! So Chinese money might become usable in Japan too!"

Rabbit-senpai: "Also, when Japan introduces a CBDC in the future, the technology and institutional design of the digital yuan might be used as a reference. Furthermore, it's possible that new financial services from China will use the digital yuan to increase their international competitiveness, so Japanese financial institutions won't be unaffected either."

Alice: "I thought this was a story about a distant country, but it seems like it might have a closer impact than I expected..."

Rabbit-senpai: "That's right. In today's increasingly globalized world, a major move by one country is bound to have ripples somewhere else in the world."

Rabbit-senpai's Quick Break Column: Red Envelopes in Digital? ~The Frontline of China's Cashless Society~

Well now, Alice, your head might be full of talk about the digital yuan, but let's take a breather here and take a peek at a realistic side of China's cashless society. I, Rabbit-senpai, am going to deliver some surprising information!

You see, in China, long before the digital yuan appeared, smartphone payments like Alipay and WeChat Pay were already as common as the air we breathe. In urban areas, you can pay for almost anything with a quick tap of your phone, from a street-side roasted sweet potato vendor to offerings at a temple. It's not even rare to find shops that refuse cash.

Alice: "Whoa! Even temple offerings are done by smartphone!?"

Rabbit-senpai: "That's right. So, among the younger generation in China, there are even people who haven't touched cash in years. It's normal to live your life with just a smartphone, without carrying a wallet.

And what's interesting is that traditional customs are also being digitized. For example, in China, there is a custom during the Spring Festival (Lunar New Year) of giving money in red envelopes called "Hongbao" as New Year's gifts or monetary gifts, but now it's mainstream to send digital Hongbao to each other via WeChat Pay and the like. It seems friends even enjoy competing for digital Hongbao like it's a game."

Alice: "So the red New Year's gifts are digital too! It feels a bit like it has charm, or maybe not..."

Rabbit-senpai: "Haha, that's the interesting fusion of culture and technology, isn't it? If the digital yuan becomes widespread, it might become the norm to send these digital Hongbao using the digital yuan as well. If that happens, the government could potentially track the flow of people's money, even down to the exchange of New Year's gifts... that's a possibility."

In this way, China's shift to a cashless society is creating new challenges regarding how personal data is handled, hidden behind the convenience. How will the digital yuan change this trend, or will it accelerate it? That is one of the points that I, Rabbit-senpai, am secretly keeping an eye on. Well, being too convenient has its downsides, I suppose!"

Summary

Alice: "Wow, the story of the digital yuan was truly grand! It's like a movie, seeing China trying to change the world... There are many good aspects, but I'm a little worried about things like privacy."

Rabbit-senpai: "That's true, Alice. The digital yuan can be called a major experiment for the currency of the future, possessing both light and shadow. Because of the scale of its ambition, the impact it will have on the world is immeasurable. However, we need to keep a close watch on how they overcome those challenges and what kind of influence it will have on our own lives."

Alice: "Yes! I want to keep what you taught me today in mind as I watch the news from now on! I feel like I understand a little bit more about the money of the future!"

Rabbit-senpai: "That's wonderful, Alice! It's important to understand both the potential and the risks of any new technology. The adventure of the digital yuan has only just begun. Since a lot of new information will likely come out, let's keep following it together!"

Next Episode Preview

Alice: "China's digital yuan was amazing, but come to think of it, I think I heard that Facebook once tried to create a digital currency...? What ever happened to that?"

Rabbit-senpai: "Oho, Alice, you've noticed something good again! Yes, there was once a grand digital currency initiative centered around Facebook (now Meta) called "Libra (later renamed Diem)". It drew attention as something that might change the world, but in the end... hmm."

Alice: "Eh, what happened to it!? I'm curious!"

Rabbit-senpai: "Alice and Rabbit-senpai's Cryptocurrency Wonderland Adventure, next time: 'Why Did the Libra (Diem) Initiative Fail? Facebook's Grand Dream and the Wall of Regulation'! Why didn't the currency of the future that a giant tech company dreamed of come to fruition? We'll get to the bottom of the story behind that grand tale! Look forward to it!"