China's National People's Congress has passed a new cryptography law, despite cryptocurrencies like Bitcoin currently being banned in the country.

Key points: China's new cryptography law will come into effect next year

China's new cryptography law will come into effect next year The digital currency is expected to be backed by China's central bank

The digital currency is expected to be backed by China's central bank It will work alongside mobile payment platforms like Alipay and WeChat Pay

China has attempted to stamp out cryptocurrency trading in the past, but the latest move suggests Beijing may be making serious moves to establish a framework for digital finance, while opening the doors for increased research and innovation in blockchain technology.

And analysts believe one of the world's biggest economic powers is laying out the groundwork for the first large-scale, nationalised digital currency in the world.

"We must take the blockchain as an important breakthrough for the independent innovation of core technologies," President Xi Jinping was quoted as saying in state media this week.

While the details surrounding China's plans remain murky, here's a look at what the law says, how it might be implemented, and whether China can really pull it off.

What's in the law?

The digital currency is expected to be backed by China's central bank. ( Reuters: Peter Kundzic )

Cryptography is essentially a method of protecting information, such as passwords, through the use of codes, and it forms the backbone of blockchain technology.

The new law, set to come into effect on January 1, is geared at "facilitating the development of the cryptography business and ensuring the security of cyberspace and information", according to state media agency Xinhua.

It's also aimed at protecting intellectual property rights in cryptography, and supporting scientific and technological research in the field.

"The law underlines the training of talent in cryptography and says that those with outstanding contributions in the work on cryptography can be rewarded," Chinese media reported.

The law would see cryptography classified into core, common and commercial categories: core and common would include cryptography used to protect Government information, while commercial cryptography would cover just about everything else.

Core and common cryptography would essentially be considered as "state secrets" under the law — but commercial cryptography would be available to civilians, businesses and organisations.

Importantly, the rollout would help create a regulatory environment in China suitable for the establishment of the world's biggest state-backed digital currency.

"It is necessary to strengthen the guidance and regulation of blockchain technology... [and] to implement the rule of law into the network management of blockchain," Mr Xi said.

Digital currency in the works for years: expert

China started developing the digital currency around five years ago. ( ABC News: GFX by Jarrod Fankhauser )

The digital currency is expected to be backed by China's central bank, the People's Bank of China, and is being referred to as DCEP (Digital Currency Electronic Payment).

In 2014, the central bank set up a research team to explore launching its own digital currency, in order to cut the costs of circulating traditional paper money and boost the control of money supply.

"China started developing the digital currency a long time ago — the central bank has got more than 84 patents related to the digital currency's release, distribution, administration and circulation," digital economic analyst Yunlin Sun told the ABC.

While there is still no clear schedule for the currency's rollout, details are expected to be announced very soon.

Mr Sun said the launch was expected to take place over different stages.

In August, China's powerful State Council announced that the city of Shenzhen — which borders Hong Kong and is a major technology hub — would serve as a pilot region to test out the currency, although it is unclear when this will happen.

"Support the innovative applications such as digital currency research and mobile payment in Shenzhen … Pioneering the promotion of RMB internationalisation and developing cross-border financial supervision," the State Council said in the August statement.

If the pilot proves successful, it's expected that Beijing will release the DCEP to commercial banks and mobile payment platforms, who would funnel and distribute the digital currency to the public.

Can Beijing really pull this off?

Mobile payments are already very common in China, the biggest platforms being Alipay and WeChat pay. ( Supplied: Socialise Photo )

While other countries have been experimenting with national digital currencies — Sweden for example has been working on the e-Krona, and the Monetary Authority of Singapore and Bank of Canada also have digital currencies in the works — China's would undoubtedly be the biggest in the world.

Whether or not it can pull it off remains to be seen, but the new laws are the biggest show of formal support for a Chinese digital currency yet.

However analysts say it's unclear how much of a say people will have over whether or not to use the currency.

"Given its official nature, individuals and companies cannot refuse being paid in this way, which is a privilege that WeChat Pay and Alipay don't have," Mr Sun told the ABC.

"The Government may enforce the circulation of digital currency as the only payment method in some Government departments or related institutions."

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Analysts said the centralisation of a state-backed digital currency would allow more monetary control in terms of tax or circulation.

Jason Potts, the director of RMIT's Blockchain Innovation Hub, told the ABC "digital smart money is ideal as trade currency", since it could become the naturalised currency for trading with China.

"An effective [DCEP] could extend around the Belt and Road Initiative, even to Australia. Remember this was the logic behind the creation of single currency regions such as the EU," he said.

When asked if China could pull it off, Mr Potts said: "Absolutely yes. This is one of the benefits of a powerful centralised state — that you can do things like this".

"Digital currencies and cryptocurrencies are still a new technology. They will get better, and less volatile as the technology improves and as new markets develop.

"China may well succeed where others have failed."

However, Mr Sun dismissed speculation that the digital currency could boost the internationalisation of China's renminbi, saying the move would be heavily focused on China's domestic economy.

He said it would be unlikely to make a significant impact internationally.

"The legal digital currency cannot push the internationalisation of RMB forward … it is just an option to replace cash in transactions," Mr Sun said.