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Since early this year, China has gradually ratcheted up testing of its first central bank-backed digital currency, known there as DCEP, or “digital currency electronic payment.”
While other countries have made similar attempts to launch a digital sovereign currency, moves by the world’s second-largest economy hold a higher level of significance.
“In the future, everyone will be using DCEP,” Chinese bitcoin pioneer and millionaire Chandler Guo told the BBC in August.
Imagine going to the bank to take out cash, except without going to the bank and without the cash. If the Chinese central bank’s plan for a digital yuan succeeds, the future could look something like that for everyone.
While rumors have swirled that DCEP could be rolled out to the public as early as this year, the People’s Bank of China (PBOC) aims to have the currency in use in time for the next Winter Olympics, planned for February 2022 in Beijing.
If the project succeeds, a digital yuan could eliminate the need for both physical cash and online payment services like PayPal, and be another way for China to challenge the US for global dominance.
DCEP is a digital currency backed by the yuan. Unlike bitcoin and other cryptocurrencies, whose values can vary wildly based on speculation — making them, in the eyes of most governments, unsuitable for widespread use — DCEP will be as stable as the physical yuan.
Like cash, each digital yuan is created, signed and issued by PBOC, China’s central bank. Unlike cash, however, the bank retains the ability to track the movement of every piece of digital currency it issues.
Commercial banks distribute DCEP to their customers, who can download the currency from their bank accounts into digital wallets or apps, akin to taking cash out at an ATM.
With a digital wallet flush with DCEPs, consumers can make contactless, instant payments to anyone else who uses the service, whether at the grocery store or paying back a friend. This could theoretically eliminate the need for third-party digital payment services like WeChat or Alipay, currently very widely used in China.
The well-established Chinese habit of paying with a mobile phone should make the transition to a digital yuan an easy sell for consumers there while offering big benefits to the Communist regime.
Issuing a digital sovereign currency could be one way for the government to regain control of domestic financial transactions, says Konrad Adenauer Stiftung Senior Project Manager Alexander Badenheim, speaking with DW from Beijing about a foundation report on digital currency developments in China.
Doing so might also give China an edge over other countries in this domain, potentially becoming a technological pathbreaker in the transition to a digital currency as more and more adopt similar technology.
China may “hope to create its own international payment architecture, something comparable to SWIFT,” Badenheim said, referring to the code that helps financial institutions process transactions, “but which would be more centered on digital currencies and dominated not by the US dollar, but by the Chinese digital yuan.”
“I think that’s especially important in current times where we talk about the decoupling between the US and China,” he added.
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