Many seem to have been surprised by the news that China became the first major economy to come out with its own digital currency. For those who have been paying attention to what’s going on in the digital currency space and in the global financial system in general, it comes as no surprise.

Ever since bitcoin became a thing and everybody started talking about it, there’s been speculation about which central bank will be the first to launch its own version of digital money. After all, we know that nation states and central banks will do their utmost to keep the monetary system under their control. “We must do everything possible to make sure the currency monopoly remains in the hands of states,” declared German Finance Minister Olaf Scholz at the G-7 finance ministers meeting in December, 2020.

The fact that The People's Bank of China (PBOC) was the first major central bank to launch its own central bank digital currency (CBDC) shows that China is not afraid of taking bold actions and can implement complex new systems much quicker than their American or European counterparts.

Here are my four key takeaways of China’s new digital yuan, or the Digital Currency Electronic Payment (DC/EP) as it’s called officially.

1. It’s a way for China to reduce systemic risk, which comes from the fact that China’s digital payments arena is dominated by Alipay (run by Alibaba affiliate Ant Group) and WeChat Pay (run by Tencent). Should one of these fail, a lot of bad things could happen. They might also become too powerful entities, at least in the eyes of the Chinese Communist Party (CCP). By introducing a new system, the PBOC is trying to level the playing field and increase competition in the Chinese payments space.

2. The digital yuan is not a cryptocurrency, but instead a way for the PBOC to combat the threat that decentralized cryptocurrencies pose to all nation states. Cryptocurrencies, like bitcoin, are not controlled by any central authority. The digital yuan is a CBDC with a two-tier distribution system. It means that the PBOC, as a central authority, will distribute the digital yuan to commercial banks, and the commercial banks will be responsible for getting the currency into the hands of consumers.

3. It’s the perfect surveillance tool. To be sure, any centrally controlled digital currency can effectively be used for both good and bad surveillance and control. Good examples include macro level monitoring of money usage and spending, and detection as well as prevention of transactions related to crime or terrorism. Bad examples include micro level surveillance of how people spend their money, i.e. tracking how you live your life, and potentially also meting out and collecting fines as soon as an infraction is detected.

4. It’s meant to disrupt the dominance of the US dollar as the global reserve and trade currency. As the WSJ reported: “Beijing is also positioning the digital yuan for international use and designing it to be untethered to the global financial system, where the US dollar has been king since World War II.” The digital yuan could also provide a way to circumvent US sanctions, because the system lives outside SWIFT, the global bank messaging network used in money transfers, which the US government can monitor.

These are early stages for the digital yuan and it’ll be interesting to see how large of a role it will take in the Chinese economy within the next few years. Will it diminish or at least change the role that the Chinese big tech firms have in payments? Will it replace the traditional yuan entirely? I’m assuming that’s the plan, but it might take time because the PBOC won’t increase the amount of money in circulation and therefore, every yuan issued digitally has to essentially cancel and replace one yuan circulating in physical form.

It’ll also be interesting to see what impact the digital yuan will have outside of China. Can it become a popular currency for international trade and become a credible challenger to the dollar? Currently, the dollar is used in 88% of all international foreign-exchange trades whereas the the yuan is used in just 4%. In other words, the gap is huge, at least for now.

Finally, I wouldn’t be surprised if several other central banks soon come out with their own plans for a digital currency. We know from reports that most of them are studying the matter. In a recent Senate hearing Fed’s Jerome Powell said that researching how the dollar could be digitized is a “very high-priority project” and that “we don’t need to be the first, we need to get it right”.

The sad truth is, however, that sometimes being first really does matter, and I’m absolutely certain that there are lots of people within the Fed and the ECB who are justifiably very worried about the situation.