Digital currencies are still a new concept in our world, and it probably takes some time until the worldwide financial sector adapts itself to this new concept. However, China has already become a pioneer in utilizing digital currency in its e-commerce business. China has established a Central Bank Digital Currency (CBDC) and completed a trial of a digital currency in September 2020. We will review this digital currency in this article.
China’s digital currency
China’s digital currency is called the Digital Currency Electronic Payment, also known as DC/EP. This currency is basically the digital version of the Yuan, China’s national currency. The development of this digital currency took more than five years, and it is backed by the Yan deposits in the Central Bank of China. It is currently tested in four Chinese cities: Shenzhen, Suzhou, Chengdu, and Xiong’an. Chinese banks are required to convert a part of their Yuan holdings into DC/EP and distribute them to citizens and businesses via mobile technology as an attempt to facilitate the huge amount of mobile payments done in China.
DC/EP is not a cryptocurrency
In September 2017, seven government agencies of China jointly issued the “Notice regarding Prevention of Risks of Token Offering and Financing” (the “Notice”) and banned all initial coin offerings and cryptocurrency exchanges in China. However, the DC/EP is supported and developed by the government of China. Therefore, the biggest difference between DC/EP and cryptocurrencies is their legal status. The DC/EP is distributed to people by banks, and people can use it as a payment method for purchasing goods.
There are other differences between DC/EP and cryptocurrencies. One major difference is the centralization nature of the DC/EP. While all cryptocurrencies are decentralized, DC/EP is just a digital version of the Yuan. So, it is more or less the same as every other fiat currency and is firmly controlled by China’s government.
Another difference that stems from decentralization nature is anonymity. Cryptocurrencies are decentralized, which means no authority has control over them. Therefore, they are anonymous. On the other hand, the DC/EP is controlled by the government of China. So, the Chinese government can trace all transactions through its economy and monitor how and where the currency is being used.
Why has China developed a digital currency?
This project brings several benefits to China. The first and probably the most important one is better tracking transactions through the economy to make financial decisions better and more efficient. Cash payment is the dominant mode of transaction in China; however, with the growth of the internet, new forms of payment have emerged in the past few years. These new forms of payment are digital payments using QR codes or mobile devices. The growing popularity of this type of payment was reportedly a driving force behind introducing a digital currency because it is easier to track a digital currency than cash.
The second benefit of a digital currency can include the unbanked population into the mainstream economy. There are millions of people in China without access to a bank, and a digital form of Yuan will facilitate their participation in the country’s economy. It is also noteworthy that the digital Yuan will include the unbanked population into the economy without a need for expensive banking infrastructure.
The third benefit of digital currency for China is the possibility of driving China’s national currency to international reserve status. After the global financial crisis in 2008, which started in the US, many international economists and bankers urged the possibility of replacements for the US dollar for international trading. Despite all these discussions, the US dollar is still accounted for more than 88% of all international transactions. However, China’s national currency is a natural rival to the US dollar as China is currently the world’s second-largest economy and is forecast to be the largest one by 2028. Introducing a digital form of currency will facilitate adapting China’s currency in international settlements.