To stay ahead of global competition, China plans to introduce its digital currency as the Digital Currency Electronic Payment (DCEP). China’s digital currency will encourage daily banking activities such as deposits, payments, and withdrawals from the digital wallet.
History of the Chinese currency
According to Wikipedia, the history of Chinese currency spans more than 3000 years. The currency of some type has been used in China since the Neolithic age, which can be traced back to between 3000 and 4500 years ago.
Cowry shells are believed to have been the earliest form of currency used in Central China and were used during the Neolithic period. By some accounts, ancient China was the birthplace of the currency.
Around 770 BC, people there started exchanging coins for goods and services. However, rather than the familiar round minted shape we’re used to today, these “coins” were cast in the form of shells, or miniatures of standard tools like spades or knives. Then Paper money was invented in China in the 9th century, but the base unit of currency remained the copper coin. Copper coins were used as the chief denomination of currency in China until the introduction of the Yuan in the late 19th century.
Therefore, it may be appropriate that China be the first country again to sacrifice physical money in favor of digital legal tender.
What is Digital Currency?
Digital currency is simply a form of money or balance available in digital or electronic form; It is stored in distributed databases on the Internet, in electronic computer databases, within digital files, or in stored-value cards.
Digital currencies display properties similar to other currencies, but banknotes and coins do not have a physical form. When not in physical form, they allow for almost instantaneous transactions. Usually not issued by a government body, virtual currencies are not considered legal tender, and they enable ownership transfer across government boundaries.
In contrast, physical currencies, such as banknotes and minted coins, are tangible, and transactions are possible only by their holders who have material ownership.
What is DCEP?
“Digital Currency Electronic Payment” (DCEP or CBDC) is China’s national digital currency built with Blockchain and cryptographic technology. The DCEP is a digital currency supported by the yuan. Unlike Bitcoin and other cryptocurrencies, whose values can vary wildly based on speculation – making them, in the eyes of most governments, unsuitable for widespread use – the DCEP will be as stable as the physical yuan. This revolutionary cryptocurrency could become the world’s first Central Bank Digital Currency (CBDC) as it was issued by the State Bank People’s Bank of China (PBoC).
The goal and objectives of the currency are to increase the circulation of the RMB and international reach – with eventual hopes that the RMB will a global currency like the US Dollar. DCEP is not listed on cryptocurrency exchanges and will not be for speculation of value. So, this cryptocurrency is unlike any before it, DCEP is pegged 1:1 with the Chinese national currency “RMB” and is NOT for speculation.
China’s digital currency usage has advanced again as 50,000 randomly selected citizens in South China’s Shenzhen received a total of 10 million yuan ($1.5 million) worth of digital currency in a digital lottery that culminated on October 12, 2020.
How does DCEP work?
DCEP is the digital version of the yuan, China’s physical currency. DCEP is a digital unit that resides in digital wallets, whose app will be authorized by the PBoC and can be downloaded by users—it is still unclear whether downloading the app would require formal registration. It has been claimed that DCEP can be transmitted directly from wallets to wallets independent of banks or any other intermediaries via the Internet or phone connections, or absent those connections, by putting two mobile phones close together—probably using near field communication protocols.
When launched, China’s digital currency will require consumers to download an electronic wallet application. Tech companies like Tencent and Alibaba develop apps that allow people to exchange money digitally with their phones. People have to link the application to the bank card and start transacting.
The money held by consumers in the linked bank account will be converted into digital form, facilitating transactions. These apps have proved to be extremely successful, in which millions of Chinese citizens use them regularly.
As such DCEP is the legal tender of the country, being issued by the central bank and parts of its liabilities. In a centralized system, the PBoC issues DCEP to commercial banks against equivalent cash or banks’ deposits at the central bank. Commercial banks then distribute DCEP to their clients, assuming client-facing interactions including Know Your Customer (KYC) due diligence. The PBoC can allow other intermediaries that can fulfill the same requirements to distribute its DCEP.
Also, it has been highlighted that DCEP wallets can be easily used to scan each other’s QR codes on payment platforms such as Alipay or WeChat Pay. Indeed, in China, 83 percent of payments China in 2018 were made through mobile devices, while 17 percent through cash or bank cards. According to PBoC, DCEP can accelerate progress towards a cashless society and increase financial inclusion.
The ease of use together with the direct transmission between wallets independent of intermediaries suggests that banks will not necessarily keep records of DCEP transactions and it’s not clear how the authentication of transactions will work—the private-public key encryption usually associated with digital tokens is certainly not as easy for the public to use as scanning QR codes (not to mention the risk of losing or misplacing the private key).
The money held by consumers in the linked bank account will be converted into digital form, facilitating transactions. The applications have proved to be extremely successful, with millions of Chinese citizens regularly in use.
Why is China going to use digital currency?
The main reason for creating a state-backed China’s digital yuan is that they initially lacked the credit-card-based payment infrastructure in other countries like the U.S. Also, China’s digital Yuan aims to enhance the ability of regulatory authorities to examine the financial and nation’s payment systems.
China has recently established an initiative to push forward for adopting Blockchain technology, intending to beat competitors like Facebook Libra – a currency that Facebook CEO Mark Zuckerberg claims will become the next big FinTech innovation. However, China has been explicit in stating that Libra is a threat to China’s sovereignty, insisting that digital currencies should only be issued by banks and governments. DCEP is not listed on cryptocurrency exchanges and will not be available for speculation of value.
China has made explicit that Facebook Libra poses a threat to the sovereignty of China, insisting that digital currencies should only be issued by governments and central banks.
Therefore the key objectives to make the RMB more universally accessible and cater to the currently unbanked demographics that are part of China’s Belt & Road Initiative. This is in part with China’s overarching goal to elevate RMB to a status that would compete with the USD.
This will give more power to the authorities that citizens have to take care of how citizens use money. The database can be verified in real-time and played a role in keeping digital records and checks those who have committed money laundering, tax evasion, or other related crimes.
The launch of China’s digital currency also aligns with the initiative of China to internationalize the Yuan. In case the new payment system includes cross-border payments, it will help enhance the status of the reserve currency. Already, nineteen companies, including McDonald’s and Subway, are participating in the trial. Also, the digital Yuan would bring down the transaction costs for the various enterprises, which was high in paper cash.
“In theory, following the launch of the digital yuan, there will be no transaction that regulatory authorities will not be able to see – cash flows will be completely traceable,” Xu said.
When will China’s Digital Yuan will launch?
Six years ago, China’s central bank sawed the upsides of developing its own digital Yuan. China has not announced any official timetable for the official launch of its DCEP system, but speculation is rising that it will be offered to the public in 2020 or 2021.
As of April 2020, this program is being taken up for a trial run in four Chinese cities – Shenzhen, Suzhou, Chengdu, and Xiongan Zone near Beijing, which will later be expanded into pilot events for the 2022 Winter Olympic Games in Beijing. And Zhangjiakou of Hebei.
The test will be expanded to more areas next year, and the bank will conduct an examination of the digital currency and launch a call for projects before the end of the first quarter of 2020. But due to Covid-19, China was closed for about six months, and due to which the trials were also closed.
Difference between China’s digital currency and cryptocurrency
China’s digital Yuan is tied to the value of the typical physical Yuan. Because it is state-backed, this means that the government is responsible for it, and should be stable compared to cryptocurrencies like bitcoin, where value can swing wildly. And because the state supports it, it means that it will be more widely accepted.
DCEP operates through two-tier operating systems and does not use blockchain technology, increasing the presence of PBOCs in the financial system and the risk of political interference. Theoretically, greater power given to the PBOC by the DCEP allows it to have more control over the total amount of money supply according to economic conditions.
While the blockchain is public, anyone using it can remain anonymous. But if the Chinese central bank develops and distributes the currency, they can see who is involved in every transaction. China has a scandalous history of being a surveillance state, and this may be another opportunity to continue their surveillance methods.
A significant route for adopting cryptocurrency is the lack of government recognition and widespread acceptance. But there are some benefits to cryptocurrency that China’s officially accepted bucks lack, especially when it comes to privacy. A major appeal of bitcoin and others is blockchain, an encrypted and decentralized ledger tracking where the money goes.
But bitcoin, along with many of the cryptocurrencies, faces criticism for being accessible to illegal activities and volatile trading prices. While China’s digital currency will help control activities like money laundering and tax evasion, cryptocurrencies fail. They are vulnerable to volatile trade prices as well as illegal activities.
All these benefits and disadvantages of digital currency have left many questions about the future, and we only guess what will happen next? Will, the digital Yuan spread globally due to its convenience and stability, or will the rest of the world opt-out of handing their financial data over to China? Will the U.S. government try to digitalize its dollars?
No one knows these answers to any of these questions, but we can at least predict what will happen next, while a digital currency seems all but inevitable. There will be no access to technology, and others will still prefer the old-fashioned physical wealth. Even if the digital currency soon becomes widespread, physical cash will not disappear. At least not right away.