The impact and value of digital RMB to the Chinese Economy (DCEP)
Despite the economic contraction brought on by the pandemic, the global race for digital currencies continues, this article will be focusing on the value of developing the infrastructure for the digital RMB and its sustainable development.
China actually made plans years ago for a legal digital currency to be issued by the central bank, where four large state-owned banks are simultaneously conducting large-scale tests of the central bank’s digital currency in major cities such as Shenzhen, which seems to suggest that the landing of a digital Yuan is even closer. The central bank is also working with a number of Internet companies, including online car giant DIDI, to find applications for the digital Yuan, and the Suzhou government has begun to issue transportation subsidies to civil servants through the digital currency.
Zhou Xiaochuan, the governor of the People’s Bank of China, said in 2016 that China will plan to replace the 800-year-old paper currency with digital currency in about ten years, and the legal digital currency will replace the total cash in circulation.
With China’s reform and opening up policy, the process of internationalization of the RMB has been accelerating, and its status in the international monetary system is different. In recent years, the rise of digital currencies represented by Bitcoin, ETH, Libra and other virtual currencies, supported by technical credit, as well as the popularity and universality of electronic payments, have attracted the attention of the market and the international economic system. With the rise of digital currencies, their payment security and stability of the financial system have also attracted widespread attention. The central banks from all over the world are starting to launch legal digital currencies, and the central bank of China is the early one to conduct the demonstration study of digital currencies. In 2014, the People’s Bank of China carried out substantial issuance promotion work, for which a legal digital currency research group was established to demonstrate the feasibility of issuing legal digital currencies.
【Keyword】
Digital Currency/DCEP/Blockchain/Cryptography/Third Party Payment
What is DCEP?
The development of DCEP began in 2014 with the establishment of a research institute dedicated to digital currencies and the use of blockchain technology to improve the RMB system. However, the development process slowed down between 2014 and 2018, possibly because the decentralized nature of Bitcoin or blockchain is incompatible with the nature of the RMB as a legal national currency. China’s national digital currency, DCEP (Digital Currency Electronic Payment, DC / EP), will be constructed using blockchain and cryptography. Issued by the People’s Bank of China (PBoC), the national bank, this revolutionary cryptocurrency could become the world’s first central bank digital currency (CBDC). DCEP is the only legal digital currency in China, while cryptocurrencies such as Bitcoin are not legal tender in China. The goal of the currency is to increase the circulation and international influence of the yuan, with the ultimate hope that it will become a global currency like the U.S. dollar.
China recently developed an initiative to promote the adoption of blockchain with the goal of beating out competitors like Facebook Libra, a currency that CEO Mark Zuckerberg claims will be the next big Fintech innovation. Facebook Libra poses a threat to China’s sovereignty, so the Chinese central government insists that digital currencies can only be issued by the government and central banks.
DCEP is a cryptocurrency created and recognized by the Chinese government, which collects data related to currency creation, accounting, etc. in real time, thus providing a useful reference value for cryptocurrency references and monetary policy implementation. It is not a third-party stablecoin, such as Tether’s cryptocurrency token “CNHT”, and it is pegged to the RMB at a 1:1 ratio. The China Center for International Economic Exchanges has been working on DCEP for five to six years and is fully confident of introducing it into the Chinese financial system, with the People’s Bank of China currently launching and issuing the currency.
For example, the EU country, Lithuania has tried to issue a digital currency called LBCoin, which is the first digital currency issued by the central bank of a country in the world. This digital currency is produced based on blockchain technology and consists of six digital tokens and one physical silver coin. It is sold in a package for 99 euros and is mainly used for collecting. The first round of 4,000 LBCoin can be exchanged directly with the central bank as well as with a dedicated blockchain network. Six other central banks, including the Bank of Japan, are collaborating on the digital currency and have stated that a Chinese digital currency would pose a challenge to the existing global reserve currency system.
The emergence of digital currencies has brought a great impact on the existing sovereign credit currencies and provided new alternative ideas to build a new international monetary system based on technology credit. However, private digital currencies have obvious shortcomings in terms of issuance mode, technical credibility and transaction speed, and the legal digital currency issued by central banks is expected to replace traditional currencies in the future.
After six years of analysis and demonstration, technical research and risk regulation, China has entered the closed pilot testing phase. The current digital currency pilot areas include Shenzhen, Suzhou, Xiongan New Area, Chengdu and the future Winter Olympic Games scenario.
According to the available public information, China’s digital currency will have the following features:
First, it adopts a two-tier operation mechanism. The central bank issues digital currencies to commercial banks, which in turn issue digital currencies to the public, in line with the existing currency delivery system and binary account structure.
Second, the central bank maintains technology neutrality. The PBOC does not pre-determine the technical route and fully mobilizes market forces to achieve system optimization through competition, joint development and joint operation.
Third, digital RMB mainly replaces M0.
The significance of DCEP:
- It is designed to replace the reserve (M0) system, thereby reducing the cost and fees of bank transfers.
- It mitigates the risk of offline paper money transactions such as anonymous counterfeiting, money laundering and illegal financing.
- DCEP also reduces the cost of maintaining and recycling banknotes and coins.
- It can reduce the differences between different sovereign currencies in terms of existence, technical architecture, issuance models, payment settlement, etc.
The People’s Bank of China has made it clear that DCEP is a centralized, sovereign-issued currency that does not speculate on its value and that it will exist in “digital form of the renminbi”. Basically, the DCEP is expected to be a digital version of the RMB. The digital RMB is mainly used to replace the existing paper currency, not involving M1 and M2, and the main application scenario is the high-frequency micro-payment field.
With the development of blockchain and other digital currency technologies, various private digital currencies have emerged, and central banks are also conducting research on legal digital currencies in full swing. Digital currencies are expected to spark a revolution in the future, challenging the current traditional forms of money. This will lay the foundation for the integration of different currencies, thus promoting the internationalization and supra-sovereignization of currencies.
The issuance and distribution of DCEP will be based on a two-tier system. The first layer is between the People’s Bank of China (PBOC) and intermediaries. These intermediaries will be financial institutions (e.g., the four major state-owned banks such as China Construction Bank, Agricultural Bank of China, Bank of China and Industrial and Commercial Bank of China) and non-financial institutions such as Alibaba, Tencent and UnionPay.
Here, the PBOC will issue DCEPs to the intermediaries. The second layer will be between the above intermediaries and the retail market participants. At this level, intermediaries that have received DCEP will distribute it to retail participants and it will be circulated in the market, e.g. through people buying things in stores, etc. The main difference between issuing and distributing DCEP compared to traditional cash is that DCEP will be transferred through e-wallets rather than bank accounts.
In a nutshell, China has completed the back-end infrastructure of DCEP, as well as the setting of parameters, the development of features, and joint debugging tests, although ongoing testing is still required. According to netizens who obtained screenshots from the internal beta, the DCEP wallet will support a variety of key features, including: digital asset exchange, wallet management, and the ability to find past transactions. Other features include payments via QR codes, money transfers and mobile payments.
The pilot institutions for DCEP will be the four major state-owned banks, namely China Construction Bank, Agricultural Bank of China, Bank of China and Industrial and Commercial Bank of China. This initial deployment will be used as a formal production test of the currency system, where the network and security will be verified. In the second phase, DCEP will be distributed to large fintech companies such as Tencent and Alibaba for WeChat Pay and Alipay, respectively. Eventually, testing will be extended to 28 cities and provinces, including Beijing, Shanghai, Guangzhou and the Hong Kong-Macau Greater Bay Area. The expansion means that the coverage of the pilot test could include a potential user base of about 400 million, or 29 percent of China’s population. Monetary authorities will need to address key issues such as technology and marketing before a major expansion of the pilot program can make people increasingly accustomed to using digital currencies.
Overall, the digital RMB has achieved milestones, and with the inherent instability of the current monetary system, the development of digital currencies brings new ideas to reform the monetary system and will revolutionize the Chinese economy.
Hope you have a good understanding on DCEP after reading this article!
Cheers,
Amanda Y.
