Cryptocurrency mining
China is actively testing the Digital Currency Electronic Payment (DCEP), an electronic version of its own national currency. News of new initiatives in this area appear with enviable regularity. The Beijing 2022 Olympic Games should be the key event for the launch of DCEP into the masses. They are already promising to allow tourists to pay with digital yuan. Chinese economists talk of the state using digital currency to protect its economic independence, while foreign opponents of digitalization accuse the Chinese authorities of trying to gain more control over its citizens.
What is digital currency?
In today's world, there are two official "formats" of money: cash (in the form of bank notes and coins) and non-cash (in the form of a bank account). Plus, there are cryptocurrencies based on blockchain technology. But their status as a means of payment at the moment is at least debatable.
The Chinese digital yuan
The digital currency has elements of all of these formats, but none of them fit entirely. Like cash, it is issued by the state issuer (the national bank) to the extent necessary for the monetary policy of a particular state. However, digital currency has no tangible embodiment, but is a digital code. In this respect, it is similar to a classic bank account, where money is kept as an entry in the relevant register. However, unlike a bank account, it is not the commercial bank that is responsible for the safety of the funds in the customer's account, but again the state market regulator. Digital currency is related to cryptocurrencies by blockchain, but crypto can be issued by any anonymous person, not just the state issuer.
How China tested the digital yuan
The fact that China had started to develop a national digital currency became widely known in the autumn of 2019, when the authorities began testing the project. "Pilots" were launched in four cities: Beijing, Shenzhen, Suzhou, Chengdu, which were later joined by several other regions. The scheme was as follows: vouchers worth 200 digital yuan (the equivalent of $30) were raffled among residents, which could be spent in 3,000 outlets, including cafes, shops, as well as online services and taxis. To do this, a citizen had to create an account linked to a mobile phone number, download a special wallet app and register. The app generated QR codes, which sellers and customers could scan while paying each other. In each test, 50,000-100,000 people participated.
In December 2020, Mu Changchun, head of the People's Bank of China's payment and settlement solutions unit, said the payment system had passed the debugging stage. So far, the People's Bank of China has recorded more than 1.32 million transactions using the digital yuan in sectors ranging from transport and catering to payment for government services. "So far, it [digital yuan] is mainly for small retail payments. For example, to provide businessmen and tourists on trips with the convenience of cross-border settlements for small amounts," Zhou Xiaochuan, former head of the People's Bank of China, told TASS. However, in June, the Industrial and Commercial Bank of China (ICBC) was the first financial institution to allow customers to convert the digital yuan into cash. The digital currency can be cashed in at more than 3,000 ATMs. And in August, it was revealed that local banks were the first to use the digital yuan in futures transactions on the commodity exchange. "A clear two-tier model of digital renminbi issuance and distribution has been established. The regulator, represented by the People's Bank of China, issues DCEP and transfers it to the country's state and systemically important banks, and they distribute the digital currency to end users," Oleg Remyga, head of China at Skolkovo Business School, argues in his article.
VCG/VCG digital currency exchange machine via Getty Images
Digital currency exchange machine
Why does China need digital currency?
Switching to digital currency doesn't rid a country's economy of the risks that accompany the issuance of cash currency: inflation, exchange rate movements, etc. The issuance of one cyber yuan results in one cash yuan being withdrawn from circulation. But the need for financial intermediaries between the seller of goods or services and the consumer disappears. Digital money will move directly from one e-wallet to another, bypassing transit routes through commercial bank accounts. And the money will even be transferred offline, without access to the internet. It will also not require a bank account, which China's state broadcaster, CGTN, estimates about 20% of China's population does not have.
However, it will not be possible to do without commercial banks at all - the digital wallets will be stored on.