Digital Currency in China is Beginning to Take Shape
Many things in China are changing, including the country’s financial system. The new digital payment system is run by the Central Bank, as is its digital currency, the e-CNY, better known as the digital yuan. It is expected that digital currency will eventually replace physical currency.
The new Digital Currency Electronic Payment system (DCEP) was launched in 2019. The first trials began in mid-2020 and have been slowly introduced, starting with major centers including Shanghai and Beijing. The authorities are being very cautious about implementation, illustrating how serious the government is taking the project.
Digital Money Only Exists as Datawepay
Although digital currency can be used in the same manner as paper currency, it has no physical form. As such, digital currency can be transferred electronically from place to place anywhere in the world. The primary difference between a digital currency and a cryptocurrency such as Bitcoin is the use of blockchain technology.
All cryptocurrencies use blockchain technology so they can remain decentralized and anonymous. As such, crypto avoids the need for supervision by a central authority.
Digital currencies, such as the digital yuan, also use blockchain. However, they have a central authority, and the use of them requires user identification. A feature of DCEP is “controllable anonymity” tracking. It requires users to register a downloaded app. This degree of centralization provides the government with the ability to freeze, as well as close accounts. This is a feature that is impossible to achieve with other cyber currencies.
The Project is Cause for Concern
The WSJ (Wall Street Journal) has noted that the digital yuan project in China is causing anxiety in Washington. Wired has gone so far as to call the digital yuan a “warning to the rest of the world.” There are valid reasons for caution. Firstly, the Chinese government is given greater surveillance powers over the citizenry as well as private companies. Secondly, it has the potential to displace the United States dollar in the global economy. However, the digital RMB will find it exceedingly difficult to disrupt the power of the greenback due to its current low status.
As it stands at the moment, the DCEP is still a domestic currency. Discussions within Chinese media regarding international acceptance are limited. Instead, the attention tends to be focused on how the digital yuan can integrate and support the Chinese retail market and e-commerce businesses.
The Long Term Potential
It is thought the long-term potential of the digital yuan is its ability to subvert the power of the United States dollar. This may enable countries such as North Korea and Iran to conduct more business with China. A significant benefit of the U.S. currencies dominance is that sanctions on target economies are brutal. Countries that have a close alignment with China could very well use the DCEP, removing the burdens associated with sanctions. The digital yuan will also challenge America’s ability to enforce trade penalties against companies in China, companies such as Huawei. Digital currency also has the potential of reaching less developed areas outside of China.
Thanks to the widespread use of WePay and Alipay, China is well-positioned to introduce and adopt a digital currency. WeChatPay and Alipay are widely used, so much so that in major cities such as Beijing, these methods of money transfer are so common and physical currency so rare that street beggars carry QR codes with them to receive alms.
This adoption of technology has one advantage over other currency systems. Digital wallets do not require an internet connection. They only need a smartphone.
Control of the Financial Sector
Digital Currency Electronic Payment system is a long-term project being undertaken by the Chinese government. The slow and meticulous introduction shows just how serious Beijing is in its goal of exercising control over the financial sector. There is little doubt that the system offers considerable potential for the economic expansion plans of China. However, the international adoption of digital currency relies on how the Chinese domestic market adapts. The DCEP promises a way to strengthen the economy of the country without relinquishing regulation. However, doing so means the involvement and control of China’s central government.