China’s digital yuan takes shape with new encryption law

BEIJING -- China rolls out new rules governing online encryption Wednesday, paving the way for a digital version of the yuan and taking greater control over cyberspace.

The national cryptography law, established in October, makes government responsible for setting encryption standards covering both the state and industries. Encryption is divided into three categories -- core, common and commercial -- and the law grants the Communist Party authority over all three.

Core encryption protects highly classified state secrets, while common encryption safeguards sensitive national data. Beijing will exert strict control over these two categories. The law encourages commercial encryption, geared toward business and private use, as a tool for developing industries.

Meanwhile, the central bank is preparing to make China the first large country to mint its own digital currency. The People's Bank of China plans a virtual yuan, anticipating that it will decrease the workload at financial institutions.

The digital currency also is expected to provide China with greater insight into the financial activities of its citizens.

This virtual yuan will depend on blockchain technology to prevent fraud, and the continued development of blockchain demands advances in encryption.

Around the time the cryptography law was enacted, Chinese President Xi Jinping announced plans to devote state resources toward blockchain technology. The legislation thus is seen as crucial for advancing both blockchain and the digital currency.

Chinese authorities have tightened regulations on bitcoin and other cryptocurrencies. Officials look to employ blockchain in preventing fraud related to wiring funds overseas and falsifying records along the supply chain as well as the manufacturing and distribution networks.

China's blockchain industry will grow to 459 million yuan ($65.6 million) in 2022 with the help of state support, the Qianzhan Industry Research Institute estimates, up from just 67 million yuan last year.

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