Private digital currencies, also known as cryptocurrencies, have shot to prominence in recent years following a wave of excitement, investment, and speculation focused on Bitcoin, a distributed, cryptographically secured form of money invented by an anonymous individual or group in 2008 (see “What Bitcoin Is, and Why It Matters”). Bitcoin’s distributed ledger of transactions, known as a blockchain, makes it possible for it to operate without any central authority.

China is not the only country interested in overhauling its currency. This year India eliminated some banknotes in an effort to reduce tax evasion and illegal income. And while some other central banks, including the Bank of England, the Bank of Canada, Deutsche Bundesbank, and the Monetary Authority of Singapore, are studying digital fiat currencies, China’s test appears to be the first of its kind anywhere in the world.

One of the main concerns voiced by other central banks looking at digital fiat currencies is that they could undermine the commercial banking system by making it possible for anyone to have an account with the central bank.

China’s digital currency is designed to avoid this problem. In a paper published in Tsinghua Financial Review, an academic journal, and posted online recently, Yao Qian, deputy director of the Technology Department of the People’s Bank of China, wrote that a digital currency could be integrated into the existing banking system, with commercial banks operating digital wallets for the central bank’s currency.

And while other countries have proposed following Bitcoin’s architecture and many of the largest banks in the world are experimenting with it, the currency developed by the People’s Bank of China is also different in design.

Yao writes that the currency would only use a distributed ledger in a limited way. A blockchain might not be used to process transactions, as this could prove an insurmountable bottleneck for a currency with such a huge transaction volume as the renminbi. But such a distributed ledger might be used to periodically check who owns what. “The ownership of digital currency can be verified directly by the issuing bank, so as to realize peer-to-peer cash transaction[s],” Yao writes.

Officials from the People’s Bank of China declined to provide any official comment on the development of the digital currency or plans for its use.

There may be good reason to proceed slowly. For all the excitement over digital currencies, Bitcoin is experiencing technical problems as it grows more popular, and the community of developers behind the currency is beset by infighting over its future direction. Bitcoin’s value has also oscillated wildly in recent years (as of writing, the value of a bitcoin is $2,662, more than double its value in March). A number of other cryptocurrencies have emerged, and blockchain technology is being explored as a way to track all sorts of different things.

Still, a less decentralized currency under the control of the central bank has significant appeal. “In a place like China, they may see an opportunity to catch up with other countries; to adopt new technology; and maybe even overtake people,” says Simon Johnson, a professor at MIT's Sloan School of Management who studies monetary innovation and who previously served as the chief economist for the International Monetary Fund.

Johnson notes that China is already at the vanguard of experimentation in mobile payments and digital money, which has driven economic growth. “There’s a lot of innovation in the private sector with things like Alipay,” he says. “And China is also the biggest user of Bitcoin, as far as we can determine.”

Johnson adds that China may be the right place for an official digital currency to take off. “There’s this confluence of being at the front of the technology, getting some advantages for their payments system, and developing some jobs,” he says.