After 2014, along with the growth of blockchain-backed solutions in more and more technologies and the worldwide increase in usage of cryptocurrencies, the People's Bank of China (PBOC) started investigating ways to adapt some of these new concepts to their benefit. This is when the idea of China's digital currency started: The Digital Currency Electronic Payment (DCEP), also called e-Yuan (John, A. 2020).
2019 has seen as a turnaround in terms of development speed. After Facebook announced its plans to create its digital currency, the PBOC geared up its efforts and, one year later, announced that the back-end structure for DCEP was ready, and that tests would start as soon as possible.
The DCEP is a centralized digital currency founded on blockchain technology. It is not a traditional cryptocurrency like Bitcoin or Ethereum, rather an extension of the Chinese Yuan. The aim of DCEP is not to substitute the existing legal tender. It uses some of the features of blockchains, such as traceability and "smart contracts", to reduce the expenses and frictions of bank transactions, tackle money laundering, and boost overall financial tracking.
By having a digital currency, China also hopes that its own currency can obtain a bigger presence internationally. At the moment, the global currency is the United States Dollar (USD), and the main cross-border payment system is also the US-backed SWIFT. By being at the forefront of centrally backed digital currency technologies, China intends to provide an alternative to the status quo in areas of the world where it has a growing influence, namely the countries involved in the Belt and Road Initiative (BRI).
The fact that DCEP is intended to complement the Chinese Yuan implies that, at some point, this currency will be available to all Chinese citizens and residents. Foreign countries with a significant presence of Chinese citizens or members of the Chinese diaspora on their soil or even countries which are of special interest for China could also incorporate DCEP in some form in their payments system. In the typical Chinese fashion, however, the PBOC is testing the feasibility of the centralized digital currency in different stages. The first DCEP tests began at the end of 2020 in key cities like Suzhou, Shanghai, Beijing, Shenzhen, and Guangzhou through a lottery system. In this system, through WeChat’s mini-programs, the general public could take part in their local govenment’s lotteries. In one of the latest tests in Shenzhen, for example, 3.1$ million were distributed among the participants (Lee, A., 2021).
The DCEP rollout will continue accelerating, as business transactions are already happening (China Daily, 2021). More and more local governments in smaller cities are pushing for its adoption, and involved institutions are building platforms that promote its usage. These types of test environments ensure that the PBOC, and banks involved, can access as much data as possible. At the same time, they also generate interest within the broader population, already using Wechat and Alipay for most of their daily transactions, in a government-backed payment system.
Through the DCEP project, stricter regulation of monetary flow can be enacted, and financial crime prevention simplified. Most money-laundering cases can be prevented by having a complete overview of transactions. This is something that the PBOC and other financial institutions involved want to develop further.
The main pull factors for broader DCEP usage over existing commercial payment methods in China, such as Wechat Pay or AliPay, are its reduced costs for merchants, and its risk-reducing elements (UBS, 2020).). As there is one less party involved in transactions (no additional Payment Service Provider), merchants are accepting payments directly from consumers’ wallets without any additional charge. This means that there is no additional settlement flow from the Payment Service Provider to the bank account of the merchant, since DCEP can be processed automatically.
Besides cost advantages, another advantage is the possibility of using it offline. DCEP issues secure identification numbers, which can be saved as tokens on a mobile device. Therefore, once the currency has been verified in the consumers’ wallets, there is no need for a constant internet connection.
Regarding its use in payments, once merchants are recognized as DCEP vendors, they can use the NFC technology for easy fund access, which works similarly to contactless cards. Besides NFC, QR Payments, akin to popular contemporary payment methods, enable an easy switch onto DCEP acceptance. Moreover, additional features such as payment as remittance from the consumers’ bank account aim to increase usability from a consumer’s perspective (INAA, 2020). DCEP aims to reduce costs and make payment acceptance as simple as existing payment methods while offering additional features.
The flow of funds works similarly to a classic digital payment flow, and similarly to an Alipay payment (Alipay, 2021). However, instead of working with escrow/settlement accounts or other commercial fund tech transfers used by the Fintechs, flow transfers are under full government control. This would drastically reduce costs for merchants, as they would not have to pay fees associated with Alipay.
As a general workflow, see the following model with each step explained:
(Source: illustration developed by the Authors, 2021)
The PBOC issues a certain amount of DCEP to commercial banks/payment partners against equivalent cash deposits. The compliance checks are fully on the commercial bank side.
The commercial banks/payment partners can distribute an amount among their clients, assuming the customer fulfills the needed prerequisites. (i.e passing a certain credit score).
The users can see the amount of DCEP they have in their app wallet, through which they can also transfer funds to other users without any intermediaries. The user can also go to any shop in China, HK, Thailand, or the Emirates that accepts DCEP. In the future, all Chinese businesses will have to accept DCEP as a payment method, as it is considered legal tender.
The merchant receives the funds digitally. However, it is a direct bank-issued transaction, so there is no fin-tech intermediary involved like with Alipay or Wechat Wallet.
The merchant settles their funds with the bank/payment partner to either keep them as digital DCEP or proceed to a settlement on his physical CNY account. Currency conversion is processed as usual, as in the case of an internal payment.
China's goals for its digital currency are focused on its efficiency, security, and the fast progression of its population to an almost totally cashless society. By creating its centrally-managed monetary solution, the PBOC hopes to regain its financial oversight, recently affected by private e-wallet solutions.
At the same time, the DCEP could facilitate the usage of the Chinese Yuan in international transactions, especially in countries that are either involved in the Belt and Road Initiative or that wish to distance themselves from the United States Dollar and the SWIFT transfers system.
The DCEP might just be a major currency someday, as China is currently leading the way in this technology, but countries like Japan and the European Union bloc will soon follow suit. We will have to see how this new technology is implemented in the world's largest digital market. Currently, however, it is coexisting with the CNY, and should so far be seen as an addition instead of a full-on replacement of the physical yuan. On an international level, it can accelerate a broader Yuan acceptance, as is seen with pilot projects in Thailand and the Emirates. It would strengthen the Yuan's position in international payment acceptance. After all, a currency, digital or not, is only useful if it is accepted by as many merchants, banks, and consumers as possible.
Jorge Gonçalo L. C. Alexandre is a Portuguese freelancer based out of Tallinn, Estonia. He has a BA in Asian Studies from the University of Lisbon, has lived and worked in China, and has spent the last 4 years working in the compliance field for a major fintech company. You can find his latest thoughts and articles about Chinese technology, and society, in his weekly newsletter China Abridged. He is also available on LinkedIn.
Tom Daniel Sari’s studies focus on Chinese Fintech. He is currently enrolled in a Masters degree in Chinese economy & politics. He worked in China for a consultancy and in Germany for various banks. You can find him on LinkedIn.
The opinions expressed here are those of the writers and do not represent the views of European Guanxi.
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References
Alipay (2021) “Settlement and Reconciliation“. Accessed 06.05.2021 https://global.alipay.com/docs/ac/ams_oc/settlmt_recon
China Daily (2021) “Quánguó shǒubǐ B2B píngtái shùzì rénmínbì jiésuàn luòdì dàlián”. Accessed 06.05.2021
INAA (2020) “How Does China’s DCEP Currency Work?” accessed 06.05.2021 https://www.inaa.org/how-does-chinas-dcep-currency-work/
John, A. (2020) “Explainer: How does China's digital yuan work?”, Reuters. Accessed 06.05.2021 https://www.reuters.com/article/us-china-currency-digital-explainer-idUSKBN27411T
Lee, A. (2021) “China’s digital currency trial returns to Shenzhen for round two, with twice the participants and double the payout”, South China Morning Post. Accessed 06.05.2021 https://www.scmp.com/economy/china-economy/article/3116521/chinas-digital-currency-trial-returns-shenzhen-round-2-twice
UBS (2020) “Information technology - Understanding China’s digital currency and blockchain initiatives”, Zurich.