What is China's digital currency all about?

 China is arguably the global leader in the creation of a national digital currency, which it has been working on since 2014.

The People's Bank of China (PBOC) is leading development of the digital yuan, a so-called central bank digital currency (CBDC) that aims to replace some of the country's cash.

In the world's second-largest economy, real-world experiments are already underway. Here's what we know about the digital yuan, also known as the Digital Currency Electronic Payment System (DCEP).

What exactly is a digital yuan?

It's essentially a way for the central bank to digitalize existing bank notes and coins. In terms of cashless payments, the Chinese industry is already very mature. The digital yuan could help speed up the process.

It will be legal tender in China and will not bear interest.

“Cash use is on the decline. Cash would eventually be supplanted by a digital format. Yan Xiao, project lead for digital trade at the World Economic Forum, told CNBC that this is one of the major drivers.

What is the purpose of its introduction?

Last year, Fan Yifei, the PBOC's deputy governor, said that there is a "pressing need to digitalize cash and coin" because producing and storing them is currently costly. Cash and coins, according to Fan, are difficult to use, easy to counterfeit, and could be used for illegal purposes due to their anonymity, according to an article in the state-backed publication Yicai Global.

What is the structure of the digital yuan?

The topic has two aspects: distribution and, ultimately, how it will be invested.

A so-called two-tier distribution structure would be used. The PBOC will allocate the digital yuan to commercial banks in this manner.

Commercial banks would be in charge of bringing the money into the hands of the general public. Consumers will be able to exchange their coins and cash for digital yuan through these services.

“It will be fascinating to see how phone companies take advantage of the opportunity to enter the payments market,” Xiao said.

Fan of the PBOC also mentioned that commercial banks already have the infrastructure to distribute digital yuan and that it is preferable for them to do so instead of the central bank.

“It would be a huge waste of current capital to create a separate system,” he said.