China’s increasing cashless operations, which amounted to 49 trillion USD in 2020, have incentivised the Chinese government to create its own digital currency – the Digital Currency Electronic Payment (DCEP) or Digital Yuan. This is managed, stored or exchanged primarily on digital computer systems. China is adamant about establishing its global role in pioneering payment technology, and the DCEP will be a first of its kind for an economy of its size.
The DCEP is in a trialling phase. It has been injected for use in small scale communities and cities within China. The project is being led by the Chinese central bank, Peoples Bank of China (PBoC). The DCEP’s main objective is to increase the circulation of the Chinese yuan and extend its international reach, with eventual hopes that the yuan will become a global currency. The governor of PBoC announced in 2016 that there was no clear timeline due to the scale at which the currency is being implemented. Delays have been caused by the need for regulation developments surrounding digital currency as well as the technological infrastructure needed to support such a ubiquitous system. The PBoC has estimated a 10-year development process. Chandler Guo, a pioneer of digital currencies including Bitcoin, Litecoin, and Ethereum suggested that the ‘DCEP will be successful because there are a lot of Chinese people living outside of China – there are 39 million Chinese living outside of the country and if they have a connection with China, they will use the DCEP.’ The prospect of global use however rests on coherent regulation and technological infrastructure that can support billions of transactions a day.
The implementation of the DCEP is set to have a variety of benefits. DCEP uses ‘controllable anonymity,’ which means that both sides can be anonymous to the public when trading with DCEP. China’s efforts to curb corruption, money laundering, tax evasion, and terrorist financing, will be supported by the PBoC who would be able to monitor all trade information. Digital currency will also support a higher level of security against counterfeits. PBoC also hopes to use the Digital Yuan as a way of reiterating the state influence over its fintech industry. The huge market for e-payments is currently controlled by two major private companies, Ant Group and Tencent. In effect, the technology could become a challenger to its competitors’ cashless payment platforms.
However, the DCEP is not immune to issues that digital currencies face. By adopting the ‘controllable anonymity’ principle, transactions would be private to the outside world, but China’s PBoC would still be able to track any DCEP activity. This is a moral dilemma for users and can have severe implications on privacy as the government may use DCEP to monitor its citizens. The worries extend to the financial industry too. Investors are fearful of the effect a national digital currency could have on some of the largest companies in China. Platforms such as Alipay and WeChat Pay, which currently control 90% of digital payment in China, may struggle to incentivise transactions on their platforms as, unlike the DCEP, they charge transaction fees. Chinese TV channel CCTV claimed that use of the DCEP was ‘more convenient’ than other payment systems since the currency will have no transaction fees. This implies that there will be a state propaganda push for transitioning to this form of payment once released. Moreover, the Digital Yuan enkindles a fear of disintermediation – the possibility that commercial banks could be cut out of their traditional role. Commercial banks lend money to people through borrowing money from central banks. However, if consumers could now borrow straight from central banks through the DCEP, they are less likely to deposit money in commercial banks that use these deposits to create products such as mortgages and loans. This could be detrimental to company performance.
Despite being in its infancy, the Digital Yuan possesses many benefits to the everyday consumer and is becoming increasingly globalised in use. Investors are however concerned that this will come at the detriment of select sectors of commerce and industry. The question remains of whether the financial industry requires a complete restructuring in terms of the role of commercial banks, or whether digital currencies and a commercial bank can co-exist. This question will be at the heart of the further development of the DCEP in years to come.
By Tarun Odedra
Sector Head: Jared Gibson