1.000 years ago China was the first nation to issue paper money. Today, China is about to launch the world’s first sovereign cryptocurrency ‘DCEP’.
In August 2019, Mu Changchun, head of the PBoC’s (People’s Bank of China) Digital Currency Research Institute surprised the world by announcing China’s sovereign cryptocurrency ‘DCEP’ was nearing completion. Half a year later, DCEP pilot programs launched in the cities of Shenzhen, Suzhou, Chengdu, and Xiong’an.
Each pilot enables millions of Chinese citizens to become early adopters of their nation’s new digital coin. In order to stimulate the adoption-rate, an increasing number of government officials’ salaries are being paid in DCEP. Meanwhile, legislators are drafting new laws and regulations for DCEP’s integration into China’s financial ecosystem.
In this article, we will take a detailed look at DCEP to understand why China is developing a sovereign cryptocurrency. We will focus on the national key objectives for DCEP and dive into its international key objectives in a follow-up article.
What is DCEP?
‘DCEP’, sometimes referred to as ‘e-RMB’ or ‘Digital Yuan’, is an abbreviation for the PBoC’s sovereign cryptocurrency with the rather unimaginative name of ‘Digital Currency Electronic Payment’. It’s a CBDC (Central Bank Digital Currency) and the only legally accepted digital currency in China. Its value is a 1:1 equivalent to China’s national coin, the RMB (renminbi).
What sets DCEP apart from “traditional” cryptocurrencies such as Bitcoin and Ethereum, is that it’s centralized instead of decentralized. In layman’s terms, this means that DCEP’s circulation in China’s financial ecosystem is controlled and monitored by one single entity (i.e. the People’s Bank of China).
Although few technical specifications have been revealed, the PBoC has stated that DCEP will not be fully based on blockchain technology as it would be unable to handle the sheer quantity of daily transactions in China. Another thing that sets DCEP apart from most other cryptocurrencies is that it will not be listed on cryptocurrency exchanges, nor can it be speculated on.
How to use DCEP?
In order to make transactions in DCEP, a user will need to install a digital wallet on his or her smartphone. The wallet provides the user with a multitude of functionalities, including digital asset exchange, QR code payments, sending red envelopes (gifting money, a Chinese tradition), etc.
Users can exchange RMB for DCEP and vice versa. This can be done via an online bank account, or at a physical bank. However, to make transactions in DCEP between digital wallets neither a bank account nor internet access is required.
“Its [DCEP’s] functional attributes are exactly the same as paper money, but it is just a digital form.”
Mu Changchun, head of the Digital Currency Research Institute.
Instead of a bank account, users will have their digital wallets linked to an official identity document such as a passport or license plate. Aside from the familiar online and mobile transfers, DCEP can be transferred via ‘double offline payments’. This means two offline users can “touch” their phones to make a transaction via Near-Field Communication. Once a DCEP that has been circulating through offline wallets connects to the internet, its complete transaction history will be updated in the PBoC’s database.
But why would Chinese citizens adopt DCEP in favor of cash or the convenient financial services offered by Alipay or WeChat? And how is the PBoC involved in all of this? After all, less than two decades ago the PBoC invited the tech juggernauts Alibaba and Tencent to innovate China’s financial ecosystem for them [read all about it in my previous article]. Now all of a sudden the PBoC is driving force of innovation. How come?
Why is the PBoC developing DCEP?
In the past few years, top officials from the PBoC and China’s central government have made many statements on DCEP’s purpose. From these statements, a list of 6 national key objectives can be distilled. We will walk through them one by one and put each key objective in the right context.
1. Diversify payment tools for the ordinary Chinese citizen
Currently, more than a billion Chinese citizens use electric payment services to make their day-to-day transactions. One method of payment that is particularly popular is by QR codes. A mobile device, usually a smartphone, is used to scan a QR code in order to make an online transfer. A staggering 93% of China’s QR code payment market is dominated by two super apps ‘WeChat Pay’ (by Tencent) and ‘Alipay’ (by Ant Group).
In order to use either one of their financial services, a Chinese citizen needs to transfer money from a bank account to a WeChat or Alipay wallet. Once the money is in the wallet, the PBoC can no longer track it. Meanwhile, WeChat and Alipay make vast profits by charging each of their users a small fee.
However, WeChat’s and Alipay’s market dominance also makes China’s financial ecosystem vulnerable. Should anything bad happen to either one of these super apps (e.g. a cyber-attack, technical difficulties, etc), China’s financial ecosystem will be thrown in disarray. This is partly caused by the fact that neither tech company wants to make their financial services interact with the other. For example, it’s impossible to read a WeChat QR code using the Alipay app. And transferring money directly from an Alipay wallet to a WeChat wallet is not possible.
The PBoC has long since recognized these threats and problems. Therefore, they developed DCEP in such a way that Chinese citizens are no longer bound by third party providers or commercial banks. Instead, DCEP can be transferred between any digital wallets that are connected to official identity documents. It makes China’s financial ecosystem more versatile, and less vulnerable to disruptions.
“CBDC [DCEP] will not have an excessively large impact upon existing mobile payments… It will instead bring a more diverse selection of payments tools to ordinary people, satisfying more of their payments needs.”
Mu Changchun, head of the Digital Currency Research Institute.
But what about Ant Group’s Alipay and Tencent’s WeChat Pay? Will DCEP be their downfall? No, not quite. Both super apps offer a vast digital ecosystem of social, financial, and practical services. Many of these services have embedded themselves in the day-to-day lives of Chinese citizens. Although Ant Group and Tencent might lose their dominance in the mobile payment market, all of their other services are still very much in demand. Instead, we’ll see both companies do what they do best: adapt, innovate, and overcome.
2. Monitor the flow of money and detect fraud
DCEP’s Back-End infrastructure is set up in such a way the PBoC can monitor the flows of money as it circulates through China’s economy.
At a macro level, it enables the PBoC to do detailed analyses and calculate China’s GDP (Gross Domestic Product) more accurately. At a micro level, it enables the PBoC to monitor the transaction history of every individual DCEP through its unique identifier. If a transaction seems suspicious, the PBoC can either block the transaction directly or simply erase the DCEP from its owner’s digital wallet.
Should a Chinese citizen be worried that the PBoC is tracking each and every single transaction in the nation? The answer is most likely ‘no’. The PBoC doesn’t care when it comes to small transactions, e.g. an office worker buying a coffee at Starbucks in Shanghai, or a shop owner selling a brand new bicycle in Beijing. What the PBoC cares about are large money transfers, especially when it comes to exchanging currencies.
“We will keep the balance between the ‘controllable anonymity’ and anti-money laundering, CTF (counter terrorist financing), and also tax issues, online gambling and any electronic criminal activities”
Mu Changchun, head of the Digital Currency Research Institute.
Currently, each Chinese citizen who wants to exchange RMB for a foreign currency runs into an annual limit equivalent to $50.000 a person. It is a lucrative business for many Chinese citizens to sell their annual limits on the black market.
The PBoC is eager to get a tight grip on the situation to ensure wealth stays within China. Most likely they will use some form of machine learning technology to track and trace these money flows and act accordingly.
3. Increase financial inclusion
In the past decade, third party financial service providers such as Ant Group’s Alipay and Tencent’s WeChat greatly lowered the threshold for Chinese citizens to access modern financial services. But still, there are millions of Chinese citizens who live in places with limited internet access. Some have never even seen a physical bank.
These people can be categorized as the ‘underbanked’ (people who have access to financial services but mostly rely on physical cash) and the ‘unbanked’ (people who have no access whatsoever to any financial service).
DCEP is the perfect solution for these two groups of people as it requires no bank account or internet access. All central government needs to do is to provide these people with basic smartphone devices and digital wallets. Make no illusions, it’s still a colossal undertaking, but it’s nothing compared to building up a banking infrastructure from scratch in China’s remote and underdeveloped regions.
4. Eradicate rural poverty and expand the central government’s sphere of influence
According to the 2018 statistics, about 1.7% of China’s rural population lives in extreme poverty. They earn less than 2.300 RMB a year (about €280 or $330). The majority of them live in secluded rural regions far away from the sphere of influence of China’s central government.
In practice, the central government has the funds to lift these people out of extreme poverty. They do so by investing in local construction projects, education, modern farming equipment, and so on. However, getting these funds to where they need to be has proven to be a challenge ever since the People’s Republic’s very beginning. Through endless layers of bureaucracy and corrupted local officials, much of the funding usually ends up being squandered. Oftentimes without China’s central government even becoming aware of it.
“Lifting all rural residents out of extreme poverty by 2020 is a key priority.”
Xi Jinping, President of the People’s Republic of China.
By introducing DCEP the central government can bypass its many layers of bureaucracy and directly send the funding to whomever it needs to go to. Afterward, the PBoC is able to monitor how the DCEP circulates through the local economy. This will make it difficult for corrupted local officials to use the funding for anything other than its intended purpose.
As a result, the central government’s funding to lift people out of extreme poverty will be spent much more efficiently. Likewise, it will increase the central government’s visibility and give them direct control over what happens in China’s secluded rural regions.
5. Decrease the cost of minting and printing cash
For many of us, decreasing the cost of minting and printing cash is probably the least exciting reason of all why DCEP is being developed. However, the process of creating physical cash and bringing it into circulating in a country of 1.4 billion people is a time-consuming and costly operation. By replacing [a part of] the physical cash flow with DCEP a lot of time, money and effort will be saved.
“We are not aiming to be a cashless-society, but rather a cash-light society.”
Mu Changchun, head of the Digital Currency Research Institute.
At this moment, there are no plans for DCEP to replace the physical RMB coins and banknotes. However, should DCEP become universally adopted by all layers of Chinese society, it’s not outside the realm of imagination that China will one day turn into a ‘cashless society’.
6. Make Mainland China more accessible for non-Chinese tourists
Many foreign tourists who visit China have no clue that it is a predominantly mobile-payment nation. Even in China’s major cities, cash and credit cards are no longer widely accepted. It not only negatively affects the tourists’ spending in China but also their immersion in Chinese culture.
With DCEP, the central government enables foreign tourists to spend money effortlessly. Most likely, tourists will be able to link their digital wallets to their passports or Visa documents. It is a small but important step in opening up China to a wider and more diverse international audience.
Conclusion on DCEP’s national key objectives
DCEP is about to revolutionize China’s financial ecosystem. By doing so, it will radically change Chinese society forever. However, will DCEP achieve all its national key objectives? We will find out after its official launch in the next couple of years.
Whatever happens, DCEP’s integration into China’s financial ecosystem is going to be a learning opportunity for the rest of the world. Nations such as France, Sweden, and the Marshall Islands are currently developing their own digital currencies.
But what about DCEP’s international key objectives? How might those affect the rest of the world? According to some Western news media, DCEP’s primary objective is to topple the U.S. dollar in international trade. Sounds exciting, but is there any truth to it? Read all about it in my next article.
About the author
Max Senden is a Senior UX Designer in the Fintech industry. One of his professional goals is to introduce Western audiences to Fintech from China. By doing so he aims to bridge the gap between cultures and stimulate the exchange of ideas, concepts, and technologies between China and the West.
Remarks, questions, or feedback
Please leave a comment on this article, or connect with me on LinkedIn. Any feedback, including critique, is greatly appreciated.
Resources
- Boxmining: DCEP
- Wikipedia: Digital Renminbi
- China Banking News: China’s Statutory Digital Currency Won’t Undermine Mobile Payments: Central Bank’s CBDC Chief
- Theasiadialogue.com: China and Digital Currency Electronic Payment (DCEP): Channelling innovation
- Blockchain.news: China’s Central Bank’s DCEP is Trying to Make WeChat Pay and Alipay Redundant
- Blockchain.news: Chinese CBDC’s Backend Developments are Complete, Revealed During 2020 FinTech Forum
- Coindesk.com: China’s Central Bank Opens New Digital Currency Research Institute
- decrypto.co: DCEP: An inside look at China’s digital currency
- How would Digital Yuan Change China’s Economy?
