Mu Changchun, deputy director of China's central bank's payments department, said recently that the People's Bank of China is working on its own digital currency, which may be launched soon.

According to Mu, a centralized management model and two-tier operation system will be used to manage the central bank's digital currency. The central bank will be the upper-tier operator facilitating the exchange of the digital currency at banks and other financial institutions, with the banks and other financial institutions forming the lower tier.

Under this operating system, commercial banks and other financial institutions have to deposit the full amounts they expect to exchange with the central bank as reserves. Which indicates the central bank's digital currency will have the characteristics of infinite legal tender, and the nature of the digital currency will be digitalized yuan. The central bank's digital currency will be like a technological upgrading of the legal tender, which will not change the monetary attribute of bank reserves and cash.

Recently, some companies including Facebook and Walmart announced they will launch digital currencies. In particular, Facebook intends to link its Libra cryptocurrency with a basket of currencies with the aim of making it a standard global currency, raising public concern worldwide and making many wonder what stance the Chinese government would take on digital currencies.

The central bank's announcement that it will launch a digital currency shows the Chinese government supports the development of digital currency. As a new type of legal negotiable instrument, a digital currency signifies the upgrading of the existing legal tender, and the extension of the yuan into cyberspace.

Although Libra is linked to real assets, many governments and other institutions have questioned its validity as a legal tender since it would be issued by a non-government entity. More important, digital currency issued by non-government entities may seriously undermine global financial services and destabilize the financial market.

The digital currency/electronic payment mechanism has the credit guarantee of China's central bank. Which means the solvency of the digital currency will be fully guaranteed, and it won't have negative impact on the real economy.

The digital legal tender will promote China's financial market construction to a great extent, and help experts make a thorough analysis of the currency using big data. Data analysis of the yuan, in turn, will be a useful reference for the decision-makers and the implementation of monetary policy, even macroeconomic control policy.

The digital currency will also help build a new financial infrastructure, upgrade China's payment system, and make payments and settlements more efficient, as well as reduce the high cost of printing and distributing currency notes. It will make economic and trade activities more transparent and convenient, too, while helping curb money laundering and tax evasion, which will ultimately promote better social and economic development.

Besides, the issuance of the digital currency will facilitate the internationalization of the yuan, and build an open environment for payments, especially cross-border payments. Compared with other digital currencies, a sovereign digital legal tender is not only a convenient negotiable instrument but also comes with state credit guarantee.

The launch of the digital legal tender may also help commercial banks and other financial institutions to make financial innovations in fields such as digital credit and loan, digital asset and digital debt.

The positioning, issuing model and technological route of the central bank's digital currency show the central government is committed to ensuring the security of the digital currency. The central bank has decided to introduce a digital currency given the development of digital currencies and the changes in the global financial environment－but the decision is also based on China's real situation. Plus, the government aims to cope with the new challenges of the global financial market, as well as to seize the opportunities available in the international digital currency sector.

The author is a professor at the International Institute of Big Data in Finance and Business School, Beijing Normal University. The views don't necessarily represent those of China Daily.