China's digital currency will be distributed using a two-tiered system to help get it into consumers' hands

China's digital currency will be distributed using a two-tiered system to help get it into consumers' hands
Chinese digital currency.Reuters
  • China has become the first major economy to roll out a digital currency.
  • The digital yuan will bypass the global financial system.
  • Economists, however, warn it could endanger the US dollar in the long term.

The People's Bank of China (PBOC) has introduced its first blockchain-powered digital currency controlled by its central bank. The project took seven years to complete, according to reports.

The digital yuan is a government-sponsored virtual currency designed to trace all movements of money. For example, the state will know full details about what someone purchased and where, FXStreet reported. It will be disconnected from the global financial system, where the US dollar is dominant.

The main aim is to gain more centralized control and replace some of the cash and coins in circulation, CNBC reported. The currency is also touted as a faster and cheaper way to make domestic and international transactions.
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Thousands of people have been chosen by a lottery system, allowing them to spend their digital yuan in both offline and online stores using an app, per The Wall Street Journal.

Food and drink giants, including Starbucks and McDonald's, reportedly moved quickly to accept the new currency at Chinese outlets.

China is the second country and first major economy to roll out a digital currency. The first country was the Bahamas Central Bank, according to Bloomberg.
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Distribution of the digital yuan will involve a two-tiered system. It will be dispensed to commercial banks, which will then be responsible for getting the currency into consumers' hands, CNBC reported.

PBOC also suggested the two-tier structure can "avert disintermediation in the financial sector" because the central bank will not be in competition with the commercial banks. The virtual currency is held in cyberspace. It is available on a card or via a cell phone, and features Mao Zedong in silhouette, mirroring the paper money. Spending doesn't require an internet connection.
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Support for the digital yuan is far from unanimous as some observers think it could threaten the future of the US dollar.

John Lipsky, a former International Monetary Fund staffer, told the Journal: "Anything that threatens the dollar is a national-security issue. This threatens the dollar over the long term," in an article that described the digital yuan as "a re-imagination of money that could shake a pillar of American power."

Does this mean there is a digital dollar on the way?
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Jerome Powell, the Federal Reserve chairman, thinks so, telling Congress that it is looking carefully at issuing one. It is now a "high-priority project for us," he said.

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