With the coronavirus pandemic continuing to wreak economic havoc all over the world, China’s commitment to releasing its much-hyped digital yuan project — referred to as the Digital Currency Electronic Payment, or DCEP — as early as possible has remained impressively steadfast. In this regard, it appears as though Chinese authorities are now rolling out the digital currency for testing across Hong Kong’s Greater Bay Area over the coming few weeks.
Furthermore, it came to light on Aug. 5 that a select group of state-run commercial banks within China had been conducting industrial-scale internal tests of a digital currency wallet designed especially for the aforementioned digital currency. The banks are reportedly trying out the wallet as a means of facilitating large-scale monetary transfers alongside everyday payments using China’s central bank digital currency.
Traditionally, China has taken an extremely hardline approach when it comes to crypto regulation. However, regarding the development of its national digital currency, the Eastern powerhouse has stayed in line with its original vision — even initiating a number of pilot programs in major cities.
The initial scope of the DCEP is still not certain
Over the past month or so, several reports have been touting how the People’s Bank of China’s latest offering could potentially signal the end of the United States dollar’s current market dominance as well as disrupt the global payments market. For starters, the DCEP poses a threat to the dominance of the widely used SWIFT cross-border transaction system, especially when taking into consideration its inefficiency around time in comparison with almost instantaneous crypto transactions.
That being said, it is still largely unclear as to how blockchain technology will factor into the deployment of the digital yuan. This was echoed by Yifan He, CEO of Red Date Technology — the architect firm behind China’s Blockchain Service Network, or BSN, project. Speaking to Cointelegraph, He said that as things stand, neither he nor fellow BSN associates are clear about the role of blockchain technology in the national CBDC project, adding:
“There are two layers: A central bank layer and a commercial bank layer. The central bank one is definitely a centralized system. Some commercial banks might use blockchain technologies to settle and circulate digital yuan, but it is unclear how widely blockchain would be adopted once DCEP is rolled out.”
He also opined that during its initial phases of deployment, the DCEP will have a very limited scope of utilization — most likely on an individual-to-merchant and/or individual-to-individual level. He then went on to say that if that were to be the case, especially from an end-user perspective, the overall utility of the digital yuan would be no different than using other available platforms such as WeChat Pay or Alipay:
“DCEP will only have a visible impact on the local economy once business-to-business and business-to-individual transactions are implemented. But this implementation will involve many changes, such as tax and bank settlements. I don't think we will see that being done in a short period.”
Only niche testing is happening
As mentioned earlier, local Chinese media outlets have been reporting that the DCEP is currently being rolled out for full-scale testing across Hong Kong’s Greater Bay Area. Furthermore, a pilot program for the digital yuan will also be initiated across other major territories within the country.
It is believed that the digital yuan’s testing scope is being broadened to cover many of China’s most prosperous regions including the capital Beijing and nearby the Tianjin and Hebei provinces in the north; the Yangtze River Delta to the south; and, along China’s wealthy southern coast, the Guangdong province and the neighboring cities of Hong Kong and Macau.
However, in regard to the subject, He is adamant that the DCEP is only being tested in four cities in China and that these locations do not include Hong Kong and Macau: “If someone is testing DCEP in these locations, it must be from Shenzhen. Some banks are testing merchant processes in Hong Kong and Macau since many merchants have Chinese bank accounts and already accept RMB.”
The digital yuan’s utility and privacy
The Chinese government is not championing the anonymity aspect of crypto, and thus, the digital yuan will not be able to tout many of the same anonymity and privacy features that Bitcoin and other altcoins currently possess. However, Chinese central bankers have vowed to protect users’ privacy and have stated that the core intention underlying the DCEP is to replace some of China’s monetary base or the rarely seen hard cash that is in circulation.
In fact, the PBoC’s governor, Yi Gang, stated last year that the digital yuan is not an effort to replace parts of the country’s money supply such as bank deposits and balances held by privately run payment platforms. Speaking on the real-world utility of the DCEP, especially from a cross-border transaction standpoint, a source close to the matter who wished to remain anonymous told Cointelegraph:
“Since RMB is not freely exchangeable on the world currency markets, it is kind of pointless to consider the impact of digital yuan internationally, especially when it is only for individual-to-merchant transactions. If a merchant outside China accepts the digital yuan, he/she must have accounts (wallet account and bank account) in a certain Chinese commercial bank, and they can only convert it back to RMB, then convert RMB to local currencies through a local branch of a Chinese bank.”
However, the source added that as/when business-to-business transactions are implemented, the development will have some benefits for international companies that are doing direct business with Chinese companies.
What lies ahead?
While Chinese authorities continue to double down on the narrative that the DCEP is simply a way for authorities to fight criminal activities like money laundering, as well as assist the PBoC in controlling the circulation of physical money, the digital yuan will quite clearly be competing with a number of local digital payment systems such as Alipay and WeChat Pay.
Also, it is worth noting that China is currently one of the few countries that are testing the efficacy and mainstream viability of a CBDC. Other nations piloting similar projects include Ukraine, Sweden, Uruguay, the Bahamas and South Korea. Lastly, reports claim that the Chinese government has clear plans to test its digital offering during the 2022 Winter Olympics in Beijing; however, details regarding this are extremely limited at this point.