Is China Gearing Up For A Digital Currency?

January 15, 2021

China is one of the countries in the G-20 most focused on digitization of its money supply. The use of a digital currency to supplement the Yuan for day to day transactions, has been in the planning stages since 2014,. The economic crisis caused by Covid-19 globally, which briefly and sharply impacted the Chinese economy has further sped up thinking by Chinese authorities on this topic.

It is becoming more and more apparent that since Covid-19 emerged, people have made fewer purchases with cash. According to research conducted by Analysys, it has shown that in the first quarter of 2020 over  53 trillion yuan (7.8 trillion dollars) was processed in digital payments in China alone. In recent months, the four leading banks in China (Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China) began testing the new digital currency. People's Bank of China (PBOC) states that the new digital currency, Digital Currency Economic Payment (DCEP) which can be used on virtual shopping sites, is similar to Facebook's Libra, and Bitcoin. 

Why Does China Want to Switch to Digital Currency?

The main reason behind the transition to digital currency is the preservation of the monetary sovereignty of the country while commercial applications with digital currencies develop. The Chinese government will expand the use of the new digital currency by requiring all merchants to accept digital payments via their national digital currency called DPEC. Another reason for China’s adoption of digital currencies is that it reduces the spread of germs and human to human interactions at the point of sale. According to the Bank of International Settlements (BIS) the rate of contactless card payments worldwide increased by over 33% in March due to the spread of the virus around the world.

If all goes well, China can likely supplant the United States as the country with the largest digital blockchain infrastructure. The ultimate goal of China is undoubtedly to become the world leader in this new type of payment infrastructure. Over time, China will gain control over the economic activity of potentially half of the world's population, given the large size of the Chinese population.

What are the DCEP's Differences Between Bitcoin and Libra?

DCEP is not like Bitcoin nor Libra. It is not a commonly used “blockchain”, DCEP is using a protocol similar to the Distributed Ledger Technology. This means the People’s Bank of China (PBOC) will have full access and control to the digital currency. So, it can be understood that China's digital currency is completely different from Bitcoin, which has a decentralized network. Instead of issuing a new cryptocurrency, China is digitizing the existing Yuan that they use.

Moreover, DCEP is an application that is accepted by the government while bitcoin is not legal in lots of countries. Some countries like India, are drafting a law that bans cryptocurrencies altogether. Because unlike DCEP, bitcoin serves as an anti-authority and it cannot be controlled by a central bank of a government. Therefore, it is more likely to fluctuate in value. 

The Benefits of New Digital Currency 

As first announced in 2014, DPEC will be the world's first digitally used local currency. This new digital currency, has been touted to have many advantages, which include :

1- Payment and money transfer transactions can be performed simply by scanning barcodes.

2- Users will be able to set a potential limit on how much they can use their digital Yuan, hopefully preventing overspending and limiting fraudulent use of their wallets.

3- There will be NFC-based payment options that do not require devices to be online during money transfer. In other words, it will directly replace paper money as it can be used in regions where there is no internet.

What's Next?

To summarize, in 2020, major changes were experienced across the globe, which accelerated research and possibly country wide adoption of digital currencies. In the future, perhaps all countries will have a cryptocurrency unit within their monetary framework, but the fact that an economic giant like China is taking the first step in this regard should give countries like America pause. Our research shows that the new digital currency is already being tested in real time applications in China, with first widespread use on the popular ecommerce site jd.com.

The steps that China has taken to expand the use of digital currency and replace the use of paper money are still minuscule when compared to the number of physical Yuan in circulation. Digital Yuan will be distributed in Suzhou, with an average of $ 3 million in draws, and the winners will be able to use this money on online shopping sites.

It is possible to imagine that a large chunk of the world will seriously consider some switch to digital currency if the Chinese experiment in digitization proves to be successful.

Send more than money.