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China's use of digital currency accelerates in trial program

Central bank seeks to work with international agencies on global legal framework

HONG KONG -- China's digital currency pilot program has picked up pace, with transaction volumes doubling over the past month, according to the country's central bank governor, who said the trial has so far been smooth.

There have been more than 4 million transactions worth over 2 billion yuan ($298.4 million) in total in the trial of the world's most advanced central bank digital currency so far, Yi Gang, governor of the People's Bank of China, said at the Hong Kong FinTech Week conference on Monday.

Last month, his deputy, Fan Yifei, said the program had so far seen 3.1 million transactions worth 1 billion yuan.

"We have completed the architecture design and started joint testing" across four cities with the digital yuan, Yi said. "So far, the experiment and pilot program have gone smoothly."

The digital yuan is aimed at giving Chinese authorities more control over a rapidly digitizing economy without ceding space to cryptocurrencies, which are banned in the world's second-largest economy. Work on the digital yuan started in 2014 but details began to emerge after Facebook unveiled its Libra digital currency project in June 2019.

Rising concern that the U.S. could try to throttle China's access to the global dollar-based financial system, amid ongoing tensions between Washington and Beijing, have fed further interest in the effort.

The pilot is taking place in three cities -- Shenzhen, Suzhou and Chengdu -- and the Xiong'an New Area, south of Beijing. It began this past April and is set to be extended to 28 more cities, including Beijing, Tianjin, Shanghai, Guangzhou and Chongqing as well as Hong Kong and Macao.

The trial program has seen the digital yuan deployed in more than 12,000 different ways, including bill payments, transportation and government services, Yi said.

The digital yuan is designed to replace cash in circulation -- bank notes and coins -- not money deposited in bank accounts. The central bank and its distributors will keep databases to track flows of the digital yuan.

The digital yuan will give the authorities "controllable anonymity," which would support anti-money laundering and counterterrorism financing efforts, Yi said.

China still is in the early stages of the pilot program, he said, noting that the digital yuan also will be tested at 2022 Winter Olympics venues around Beijing. He did not specify a timeline for the full launch of the digital yuan.

A number of major state-run commercial banks have begun large-scale internal testing of a digital wallet application for use with the virtual yuan, while lifestyle apps including ride-hailer Didi Chuxing and food delivery company Meituan have also been involved in the trials.

Yi said that China needs to formulate a comprehensive legal framework to govern use of the digital yuan, adding that the central bank wants to cooperate with the Bank for International Settlements and the Financial Stability Board to discuss the regulation of central bank digital currencies and how to insure transparency.

"In the future, the central bank community will have a coordinated effort in the design" of central bank digital currencies to ensure the stability of the financial industry, he said.

Last month, China published a draft law that would give legal status to central bank digital currencies, or what it refers to as the Digital Currency Electronic Payment system, as part of the country's sovereign fiat currency.

The digital yuan will be issued by the central bank to authorized second-tier providers, including commercial banks, state-controlled telecommunications operators and online payment providers Ant Group and Tencent Holdings. The distributors must deposit exactly the same amount of their reserves with the central bank as the digital yuan they distribute.

China is far ahead of other major economies on plans for a digital currency. The U.S., European Union and Japan have yet to commit to issuing such legal tender.

The digital yuan "is a supplement of cash," Yi said, explaining that cash and digital currency will "coexist" in China for a long time.

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