China Aims For the First Sovereign Digital Currency, But Will It Succeed?

Data & Research / 11.10.2020

Currently, around 80% of the world’s central banks are looking into digital currency but it is China, who has been exploring the idea since 2014, who is in the lead. The country is already quite advanced when it comes to digital payments with 83% of digital transactions already being made through mobile devices as opposed to 17% through cash or bank cards. The majority of these are made through Alipay or WeChat. But now there is a new service on the horizon.

The People’s Bank of China (PBOC) has recently been running pilot tests of its national digital currency, the Digital Currency Electronic Payment (DCEP), in Suzhou, Xiongan, Shenzen and Chengdu. It will continue trials at 2022 Winter Olympics venues in Beijing and the nearby area.

PBOC claims DCEB will help move China to a cashless society, eliminating the need for online payment services such as Paypal. It would also give the bank, and the government, more control of digital payments by removing the dominance of services like Alipay and WeChat Pay. Unlike other cryptocurrencies, whose values can vary widely, DCEB is backed by the Yuan and stable.

China believes the currency will be a success due to its 1.4 billion population and the fact that around 39 million Chinese live outside the country. The phrases “dual circulation” and “domestic circulation” have been trending as media discusses President Xi Jinping’s plan to focus on domestic and foreign markets equally.

The digital Yuan is crucial for China to establish greater influence over global financial markets. Currently, over 60% of all exchanges between central banks are in dollars. The next closest, at 20%, is the Euro. If DCEB gets widespread uptake, foreign central banks are likely to hold some in reserve and as the sole issuer, the Chinese central bank will gain influence.

The pressure is also mounting for accelerating the development of DCEB as Libra, Facebook’s digital currency is under development and the European Central Bank has recently been discussing a digital Euro. Libra has, however, been delayed numerous times and has been scaled back considerably but it will be available to a potential 2.7 billion users. The digital Euro is still primarily just an idea but the ECB announced on the 2nd October 2020 it was preparing for a launch. The race is on.

The big question is that even if China is the first to launch a sovereign digital currency will it succeed? There is the problem of trust. DCEB is the antithesis of Bitcoin. Most cryptocurrencies aim for the separation of money and the state whereas DCEB is built on centralized control. The poses a couple of problems for foreign uptake.

One issue is that the Chinese state could, theoretically, track all transactions. This applies not just to its own citizens but to any foreign companies or countries that use it. For example, if a country sells something to China and is paid in DCEB, then China could then see what the money is spent on next. It will effectively be able to see purchases of other countries. This is not necessarily going to happen but the fact that it could, may put people off.

Also, DCEB is essentially programmable money. This means that the Chinese government could, again theoretically, deactivate a wallet or reverse a transaction if they chose to. Just having this ability may cause some to think twice about using it.

So even if China is the first, as seems likely, it remains to be seen who will be the ultimate victor in the race for digital currency. Over the next few years new currencies are likely to appear and the competition will heat up considerably. Whoever wins will gain incredible influence and international financial clout as theirs may become the de facto global currency. The stakes are big and the race has only just begun.

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Born in Bucharest, Marius is the founder of Crypto Adventure. Since his first contact with Bitcoin and cryptocurrencies, he never stopped believing that they are one of the most important innovations of our time, which will forever change the way business is done.