The Chinese city of Shenzhen will become a testing ground for a new sovereign digital yuan with residents issued millions in the virtual coin for free.
As reported by the South China Morning Post, citizens have been able to enter a lottery to receive the digital funds, of which coins worth 10 million yuan ($1.47 million) will be awarded to promote their use in roughly 3,400 designated stores in the Luohu district.
The 50,000 "red packets" will each contain roughly $30 in digital yuan. Chinese citizens living in Shenzhen have been able to apply via iShenzhen, a blockchain-based and government-operated network that backs the new sovereign asset.
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Digital Renminbi, an official state app, can be used to create an e-wallet to store and exchange the coins. The gift amounts can only be used until October 18 and cannot be transferred to traditional bank accounts. If the coins are not used, they will be taken back.
The scheme is considered a pilot for the digital yuan, also known as Digital Currency Electronic Payment (DCEP).
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By airdropping this vast amount and encouraging residents to spend their funds in a short time, China will be able to test the transactional capacity and reliability of the DCEP system, while also isolating the trial from traditional payment methods and accounts.
Typically, cryptocurrencies currently in circulation are decentralized, which means that there is no central backing -- loosening control in comparison to traditional fiat currency, but also increasing the likelihood of market fluctuations.
However, China's sovereign virtual coin is backed by the People's Bank of China (PBOC), which means the coin should be considered a government-controlled digital alternative to cash rather than cryptocurrency.
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Beyond retail use cases, transport and bill payments are also being floated as potential applications of DCEP. Other pilot programs have taken place over 2020 to debut DCEP, including in the cities of Xiongan, Suzhou, and Chengdu.
China is seeking to move to a cashless society, and state-backed virtual alternatives could provide the means to do so. However, with every transaction recorded on the blockchain, this may also be considered a risk to privacy as payments would not have the anonymity offered by traditional, physical cash.
Update 7.49am GMT: Clarified that the digital yuan is not a form of cryptocurrency and rather a digital alternative to traditional cash.
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