China to launch world’s first official digital currency
By Erik Wernberg-Tougaard
CHINA IS FAR AHEAD WHEN IT COMES TO DIGITAL PAYMENTS. THE CHINESE YUAN (RMB), HAS TO A LARGE DEGREE BEEN REPLACED BY THE USE OF MOBILE PAYMENT SERVICES SUCH AS ALIBABA’S ALIPAY OR TENCENT’S WECHAT PAY. NOW, THE CHINESE GOVERNMENT IS TAKING THE NEXT BIG STEP IN THE DIRECTION OF A FULLY DIGITIZED SOCIETY, WITH THE INTRODUCTION OF AN OFFICAL DIGITAL CURRENCY.
China is the largest digital economy in the world. With more than 900 million internet users, there are more people online in China, than in the EU and the US combined. The planned introduction of an official digital currency is the latest step in China’s digital transformation. China’s central bank, the Peoples Bank of China, has worked on the digital currency for years, but a recently leaked screencap (link in CN), has shown that they are now in the pilot testing phase of launching the currency.
With the introduction of a digital currency, China’s citizens will no longer need bank accounts to deposit money. This could be a game changer for China’s 225 million people that currently live without access to the banking system, and have a large impact on business and consumer behaviour in China. If the digital currency catches traction globally, it will have a significant influence on the international banking and finance system and may even challenge the dominance of the US dollar.
WHAT IS China’s Digital Currency Electronic Payment?
WHAT IS DCEP:
China’s Digital Currency Electronic Payment (DCEP) is a digital currency that is based on cryptographic technology. Generally speaking, it can be considered as the world’s first Central Bank Digital Currency (CBDC) and will be issued by China’s central bank, the People’s Bank of China. What makes the digital currency different from for instance Alipay or Apple Pay, is that these platforms still rely on the established banking infrastructure and in order to exchange funds, users still need to pay fees for using this infrastructure.
With China’s Digital Currency Electronic Payment the middleman is simply removed. Through the use of near-field communication money can even be exchanged offline, by putting two phones against each other (referred to as “bumping phones”). In theory, this would mean that the currency could be sent without users having to pay any fees for the transactions.
ChINA’S DIGITAL CURRENCY Is DIFFERENT FROM BITCOIN
DCEP will most likely not be a cryptocurrency like Bitcoin. In a recent webinar, one of the leading experts on the topic, Matthew Graham, CEO of blockchain technology firm Sino Global Capital, said that it is actually very uncertain that blockchain will even be behind the technology.
Whereas bitcoin is decentralised, anonymous and transparent, the new digital currency will be centralised, most likely not anonymous and transparent to authorities, perhaps, but not necessarily to everyone else. There are, however, certain overlaps between China’s digital currency and Bitcoin, such as for instance the use of the UTXO model which is used to keep track of each individual transaction. DCEP will not be listed on the cryptocurrency exchanges and is therefore not intended for speculation.
Table modified based on table from boxmining.com/dcep
It will be the only legal digital currency in China, and unlike other cryptocurrencies, where decentralisation lies at the core, DCEP is created and sanctioned by the Chinese government. Probably the best way to grasp what DCEP will be like, by a Western analogy, is by imagining if the US government created a government version of Apple Pay. The table above compares DCEP to other forms of currencies, such as Facebook´s Libra, Bitcoin and Cash.
WHY CREATE A DIGITIAL CURRENCY?
THERE ARE A NUMBER OF IMPORTANT REASONS FOR WHY CHINA WANTS TO LAUNCH DCEP. FUNDAMENTAL TO MOST OF THESE REASONS IS A DESIRE TO INCREASE POWER AND CONTROL, BUT ALSO TO IMPROVE LIVING STANDARDS AND ACCESS TO MONEY.
1. POWER AND CONTROL
In the West, there has for long been scepticism about Facebook’s Libra – the digital currency behind the Calibra wallet – and the power it will give Facebook, a multinational enterprise, to be in control of its own digital currency. Alibaba’s Alipay and Tencent’s Wechat Pay already uses a digital currency, which consumers use when they spend money on their virtual accounts. The power in the hands of these internet giants is thus immense.
Despite the fact that the Chinese government has more power over internet giants than is usually the case in the West, Alibaba and Tencent know more about the Chinese consumer than the government. And this power imbalance displeases the Chinese government. With the launch of the digital currency, power will flow back in the direction of the state and control will be consolidated.
2. BANK ACCESSABILITY IN A VILLAGE, FAR FAR AWAY
China has a population of 1.4 billion, and the life of a person in Beijing or Shanghai (tier 1 cities) is often very different to that of a person in the rural areas (tier 3 and 4 cities). While China has a staggering 760 million mobile payment users, there is still an estimated 225 million people that have no access to the banking system.
With Alipay and Wechat Pay, users have to be online in order to do transactions. One of the key features of the digital currency is that it is supposed to work offline, similar to a regular exchange with cash. This will make exchange of money easier for everyone, as well as increase traceability, which can help reduce fraud, corruption, and money laundering.
3. TRACABILITY AND PROGRAMMABILITY
People’s Bank of China (PBOC) is in complete control of the digital currency and will be able to track and follow any transaction done with it. Each currency unit will have a digital signature assigned by the People’s Bank of China. Additionally, the bank can “print” new digital currencies as it wishes, and also “destroy” them at its will. With the digital currency, the bank would be able to put limits on the size of transactions, and require certain conditions fulfilled before a transaction is accepted.
Some observers speculate that it will be linked to the country’s controversial social credit score system and that people’s access to credit and how much they can transfer, will be determined based on their social credit score.
4. CHALLENGING THE DOMINANCE OF THE DOLLAR
China now sees their position in the world to be one, where they are allowed to enter new spaces, and challenge well-established institutions. The establishment of the Asian Infrastructure Investment Bank and initiatives such as the Belt & Road Initiative and China’s Health Silk Road, are just some of the ways in which China is increasing its international influence. Internationalisation of the Chinese currency, the Renminbi (RMB) is another.
Today, the banking system is still largely dominated by the US. For instance, the dominant system for bank transfers, the Society for Worldwide Interbank Financial Telecommunications (SWIFT) has been criticized for supplying sensitive data to the US government. With China’s digital currency, China hopes to increase its position as a true reserve currency internationally, while having full control over transactions and data.
IMPLEMENTATION MODE
The roll out of the digital currency will follow a two-tier strategy, as outlined in the model seen here:
Figure from www.rieti.go.jp
First, the People’s Bank of China will issue the digital currency to the big four state-owned banks in China, namely China Construction Bank, the Agricultural Bank of China, Bank of China and the Industrial and Commercial Bank of China. These banks will then distribute it to the tech-firms and companies in the second step. The circulation will take place when individuals buy products and services from the companies using their digital currency wallet on their phone. The exchange of digital currency will take place between electronic wallets, and thus do not rely on bank accounts to function.
According to Yi Gang (易纲), the governor of People’s Bank of China, pilot testing of the digital currency will take place in four Chinese cities, namely Shenzhen, Chengdu, Xiongan and Suzhou. The testing will focus on different areas for each city, for instance Xiongan will mainly deploy the digital currency to catering and retail companies, while Suzhou will deploy it as travel subsidies (link in CN).
Foreign firms also have a role to play in the roll out of the digital currency. Companies such as McDonalds, Starbucks and Subway are supposed to be part of testing the digital currency. On the 22nd of April 2020, the National Development and Reform Commission announced that a total of 19 companies will participate in the pilot testing of the digital currency. However, it is still unclear which companies this refers to specifically.
WHY YOU NEED TO WATCH CHINA’S DIGITAL CURRENCY
A Central Bank Digital Currency, like DCEP, will in many ways fundamentally change the national (and perhaps international) finance ecosystem. It will provide multiple new opportunities for China and Chinese firms on a national and global scale.
The digital currency will have a large impact on business and consumer behaviour in China. Questions such as, how Chinese citizens will react when this is implemented as well as how foreign enterprises should respond are imperative to address for companies operating in China.
The idea of a digital currency opens up for other interesting debates, especially following the corona pandemic, where paper money can carry germs that are more easily spread. A digital currency would help to reduce the spread of disease by transferring money digitally, instead of passing on bacteria via paper money that has changed hands thousands and thousands of times.