CHINA BECOMES A FRONTRUNNER AMONG DEVELOPED ECONOMIES IN IMPLEMENTING A CENTRALIZED DIGITAL CURRENCY. CHINA’S ANOTHER ATTEMPT TO INTERNATIONALIZE THE CHINESE YUAN.
– Angelo Brian T. Castro
China has conducted the experimental implementation for its digital currency trials in many cities, including Shenzhen, Chengdu, and Suzhou. During the trials, the participants were chosen through a lottery draw. Digital yuan employs a near-field communication system that allows mobile phones to use the system without an internet connection. Choosing such a feat was proof that China would want to include areas with limited internet coverage or far-flung places. Such differences could pose an immense challenge to the currently popular applications such as AliPay, WeChatPay, and other electronic financial transactions.
The digital yuan, officially known as the Digital Currency Electronic Payment (DCEP), is the first state-backed digital currency. It is issued by the Chinese Central Bank and backed by the renminbi (RMB). It can be mistaken that China’s DCEP is a form of Chinese government cryptocurrency; however, it is not entirely the same as how cryptocurrencies are known. The difference was clarified between the more popular cryptocurrencies and DCEP soon after its introduction to the public. According to Mu Changchun, deputy director of the People’s Bank of China, there are notable differences between DCEP and cryptocurrencies. Bitcoin, Ethereum, or even stablecoins are different as these currencies are for speculation and require the support of a basket of currencies. The digital yuan is not as volatile as cryptocurrencies because the digital currency is a legal tender and issued by the People’s Bank of China and backed by China’s currency.
The introduction of a centralized digital currency could change how the Chinese people transact and how China interacts. It offers both potential benefits and challenges to China and its users. Even Alibaba’s Ant Group has been participating in the trial programs, despite their fallout with Chinese regulatory authorities in the past. This goes to show just how widespread and ubiquitous the future of this medium could be, with involvement of the main players in the field such as Alibaba and Tencent.
Security issues with money laundering, money counterfeiting, and other challenges involving money can be addressed as every transaction through the digital yuan is stored by the Chinese government. They will know who spends, what is being spent on, and where it is spent. The Chinese government can immediately freeze questionable assets or accounts. Also, it provides more accessibility for consumers as the digital yuan works even without an internet connection. Banking and businesses can also be made more convenient as it removes the third-party companies that bill transaction fees. Currently, international transactions are done through SWIFT, VISA, or Mastercard. The DCEP would lower transaction costs as these third-party companies would no longer be necessary for the process as the digital currency is from the central bank itself.
Meanwhile, the challenges in using DCEP are mainly due to privacy concerns as the Chinese government would have a complete record of every transaction made through the system. As China would gradually replace its physical currency with the DCEP, all residents and businesses would have to comply with the new regulation, including foreign residents and companies. Some critics emphasize that the Chinese government would benefit more than the people and businesses. It allows the government to monitor all the country’s transactions and extend if the system is adopted externally. The digital yuan also has an expiration date that compels its users to spend the money and prevent stagnation in money circulation. Some speculations have also risen that China’s digital currency was meant to dethrone the US Dollar as the most popular reserved currency among countries. Being the preferred currency of international transactions, the United States wields considerable power to make economic sanctions work as assets and transactions are done through the US Dollar. Therefore, China can lower the impact of US sanctions on countries that would adopt the DCEP system as the transactions would not be in US dollars.
However, the Chinese government also plans to work with SWIFT to make the DCEP system suitable for those with no issues dealing with both the renminbi and the US dollar. It becomes an interesting subject to see how the digital currency race would develop as they progress and if it can change the global financial order. Elsewhere, the Bank of England has recently announced the joint creation of a Central Bank Digital Currency (CBDC) Taskforce to coordinate the exploration of a potential UK CBDC. It is one of the pioneering and major developments in creating a state-backed digital currency in a western country. Even if China is the global leader when it comes to developing and pilot-testing their digital currency or e-CNY, the UK’s step in this direction shows the potential for western nations to put some skin in the game as well.