In a market where digital currencies are becoming more and more prevalent, Bitcoin is currently the most popular. However, this is a problem for China’s economy because it allows individuals to bypass economic supervision to speculate on digital assets’ value. If you are planning to trade digital yuan, learn more about the perks of using digital yuan.
To eliminate this competition with the Yuan, China’s central bank introduced new legislation prohibiting all digital currency exchanges and forcing them to close by the end of 2021. China just rolled out its most significant move that shocked the entire global financial segment by launching its digital currency, the digital Yuan.
The new measure is to keep currency circulation in China healthy, prevent money laundering, more importantly, eliminate speculation and inflation. Cryptocurrencies such as Bitcoin serve an essential role in markets because they allow individuals outside financial systems to invest in the country’s economy. Undeniably decentralization is the new pinnacle of the financial segment, but it also poses a problem because they are unregulated and therefore not regulated by any central authority.
According to China’s National Internet Finance Association, digital currencies create investment risks for the Chinese economy because they’re not backed by real value. So let’s find out why china banned cryptocurrencies and how it will help the digital Yuan.
Cryptocurrencies are subjected to volatility
Most cryptocurrencies like bitcoin are based on the blockchain concept and take advantage of distributed ledger technology. While it is convenient for crypto-traders, it cannot compete with a significant bank-governed currency because of its volatility. Other than Bitcoin, there are many alternative cryptocurrencies like Ethereum, Zcash and Litecoin, which have no physical value attached to them and can be manipulated in terms of supply. The volatility of major privately mined cryptocurrencies was a significant threat to china’s stability in terms of economy. However, the government neglected the fact of how much money bitcoin traders were making every single month.
Cryptocurrencies are not backed by anything tangible
Contrary to what most people believe that a physical asset backs digital currencies, they’re not. Instead, they’re based on a concept known as ‘intrinsic value, ‘ which is an object’s value as a result of itself.
But technically, no physical asset supports cryptocurrencies. Instead, their value is pegged to the money people are willing to pay for them. As a result, these digital assets are more like stocks than physical currency, whose value is attached to gold reserves or government regulation. Cryptocurrencies (unlike stocks) have no intrinsic value. They can only derive their worth from external factors such as supply and demand in global exchanges or speculative investment in the market.
Cryptocurrency mining was harming china’s environment
Unlike traditional currencies, bitcoins are mined using computers or powerful graphics processing units (GPUs). The process involves solving complex algorithms linked to its record of transactions, called ‘mining,’ which is the most challenging component of its creation. Although cryptocurrency mining is seen as benefiting the environment by helping to reduce electricity consumption and replacing the use of fossil fuels, it has become a significant environmental hazard in many countries.
China is home to one-third of all Bitcoin mining at current levels. The country accounts for more than 50 per cent of all mining activity in 2017. However, due to a lack of regulation and subsidized electricity, China’s mining industry has attracted hackers and scammers who target users with malware and phishing scams. According to the government of china, if they had continued bitcoin mining, they would never be able to achieve the goal of emission-free china by the end of 2060.
How did the cryptocurrency ban help develop and grow the digital Yuan?
While China continued developing the digital Yuan, other countries facilitated crypto transactions by encouraging crypto exchanges and launching crypto-based ICOs. In addition, the country has its CBDC showcasing its strategy to bring growth to its economy through the introduction of the digital Yuan. The cryptocurrency users earned millions monthly, and China wanted to reap that revenue.
After banning all bitcoin exchanges, China’s Central Bank stated that it did not recognize digital currencies as a legitimate form of payment or means for exchange. It banned banks from handling transactions related to cryptocurrencies, banned initial coin offerings (ICO) and prohibited cryptocurrency exchanges from operating via instant messaging apps. So digital Yuan is now the mere option for banks and other financial agencies to accept and use as a payment method.
Digital Yuan got more attention during the subsequent cryptocurrency ban in china
As china banned cryptocurrency, the whole financial market was in shambles, and the prices crashed severely. However, the digital Yuan got attention among investors, which paved the way for more established investors to attract it. Moreover, its decentralized legal status became more focused on being a potential store of value.
Perks for Chinese citizens
China’s central bank also predicted that the digital Yuan would convert into a payment method via mobile wallets and even in person-to-person and business-to-customer transactions. The currency is doing it so gracefully.