How does the digital yuan make use of blockchain to record the transaction?

    How does the digital yuan make use of blockchain to record the transaction?

    By 2020, the People’s Bank of China (PBOC) claimed that passive payments would comprise 90% of all transactions, and digital payments would increase sevenfold to $6.1 trillion by mid-2020. The digital yuan will be crucial in transitioning from cash to smart money.

    However, implementing such a change presented a series of issues for the PBOC, which has to address technical challenges from the onset. The biggest challenge was how the PBOC could ensure that digital transactions were reliable and trustworthy without compromising anonymity or privacy at the same time.

    This issue has been addressed in different ways. Digital Yuan is now being accepted by merchants who previously banned credit card payments. Consumers can now pay for things using WeChat Pay or Alipay at some restaurants, cafes, and taxi stands. Some merchants have sought to deal with privacy and anonymity issues by limiting the value of transactions that can be made using digital money.

    Differences between digital Yuan and Bitcoin?

    There is a direct relationship between the digital yuan, and the physical yuan as the digital currency is pegged to the physical yuan. Users of the digital currency can redeem it for fiat currency at any time if they wish to do so, and vice versa. Although there is a direct correlation between these 2 currencies, they are independent of each other and are separate currencies.

    Moreover, the digital yuan on a blockchain, as well as uses a centralized database to verify transactions. Bitcoin transactions are verified on a public blockchain to ensure their security and safety from fraudsters or potential hackers. The first fundamental difference between these two forms of payment is the intervention of third parties or central banks.

    Such a move by the PBOC is designed to ensure that the digital currency does not threaten its current monetary system or cause any disruptions in it. However, critics have pointed out that despite this structure and China’s involvement in crypto activities such as mining, exchanges, ICOs, and investments in other countries with crypto assets, more substantial measures can be expected from Beijing.

    Adoption of KYC:

    Implementing a decentralized cryptocurrency without compromising privacy is challenging as blockchain maintains anonymity. However, to reduce fraud, the PBOC has adopted KYC procedures, which help identify and control associated risks, as this can be particularly useful in preventing money laundering activities.

    Other challenges faced by the PBOC are consumer protection and environmental impact. For instance, when making a purchase using digital yuan or other cryptocurrencies, a consumer need not exchange his local fiat currency for getting them at the same rate of exchange in which they were initially issued. In addition, the CBDC also requires consumers to undergo verification before they can make payments.

    What is the use of blockchain in digital yuan?

    The PBOC initially adopted a centralized system for storing transaction records. In addition, it conducts KYC for each digital currency user by verifying them through databases.

    The centralization of data will help the government monitor transactions and control the money supply. Additionally, this will help combat terrorism, and terrorists and smugglers can use drug smuggling activities as anonymity to conceal their transactions.

    While the CBDC is centralized, it does not require consumers to submit personal information and other confidential data. Furthermore, the technology by which the digital yuan is managed has been tested in trials, and several functions have now been made available to the public. It includes making payments, sending and receiving money online, and wire transfers.

    However, there is still a need for a third party involved in securing this ledger via security services such as Trust Token (TT). Trust Token will provide end-to-end encryption for all customer data, including sensitive and critical information. In addition, the new blockchain-based distributed ledger will be able to automate KYC processes and allow the PBOC to access a record that forms the basis for making an approval decision.

    With this in mind, the PBOC may seek to ensure security and efficiency by encouraging its establishment as an independent not-for-profit entity. It would allow it to remain in charge of critical issues related to digital yuan, such as security, monitoring and profitability. In conclusion, while the PBoC is moving towards digitalization, it has not yet fully embraced blockchain. Despite this, the central bank has said it will welcome blockchain developers to participate in the digital economy. It is also worth noting that other Asian countries such as Hong Kong, Singapore and South Korea have begun to explore their cryptocurrencies.

    The success of any CBDC depends on how effectively it can eliminate trust issues and address privacy concerns related to cryptocurrencies. The PBOC will need to clearly understand its place in this brave new world – as a regulator or an innovator.

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