China is expected to become the first major global economy to launch their own central bank digital currency, leading the way for a number of reasons.
CBDCs are digital currencies that are issued by a country’s central bank — in this case the People’s Bank of China (PBoC) — whose status as legal tender is established through government regulation or law.
China is expected to become the first major global economy to launch a CBDC, having devoted five years to its research and system development.
What Has China Done So Far?
The country has already piloted its new currency in four major cities and key economic regions: Beijing, Tianjin and Hebei, the Yangtze River Delta, and the Guangdong, Hong Kong and Macau area.
Formally, Beijing refers to the forthcoming digital currency using the acronym DCEP — short for digital currency electronic payment — although many commentators colloquially refer to it as the digital yuan or digital renminbi.
This colloquial name makes a useful distinction from Bitcoin and other cryptocurrencies. The digital yuan is designed as a centralized, two-tier model, which is issued by the PBoC to commercial banks against equivalent cash or banks’ deposits at the central bank.
The impetus and inspiration for the digital yuan has been closely connected to both long-term and recent trends in China’s — and the international — digital payments landscape.
What Inspired China to Create a CBDC?
China’s development of its digital yuan is also said to have been accelerated by the unveiling of Facebook’s planned stablecoin, Libra, in 2019.
In this, China was not alone: numerous national central banks, as well as finance ministries, expressed their concerns about Libra as a potential threat to monetary sovereignty and noticeably upped their research into CBDC issuance.
Domestically, one facet of the DCEP will be to serve a replacement for cash, but with additional transferability and settlement features that distinguish it from the likes of AliPay.
DCEP will be stored as a digital unit in retail users’ digital wallets via a central bank-authorized app. Based on what we know so far, Chinese consumers will be able to transact the digital yuan seamlessly through their phones. For their convenience, the central bank could draw upon security and contactless technologies such as NFC, PayPass and QR codes.
Will China's 'Cryptocurrency' Be on Blockchain?
To what extent blockchain technology will feature in aspects of the DCEP system remains to be seen.
Local developers have confirmed that the PBoC layer of the system will be centralized and not based upon blockchain, though there is a possibility that commercial banks could use blockchain technologies, or aspects thereof, for their own settlement and circulation of the currency.
This will, in part, depend on how far they can overcome scalability limitations while achieving the throughput that is required for retail transactions at a mass scale.
Beyond retail use, the rollout of a digital yuan opens up significant possibilities for monetary and fiscal policy, as well as for data-driven regulation — helping the PBoC in its supervision of anti-money laundering, anti-terrorist financing and anti-tax evasion measures.
Unlike cash, DCEP holdings in digital wallets could also be subject to negative interest rates from the central bank, providing a source of additional leverage in monetary policy.
Can This Help China Internationalize the Yuan?
Lastly, there have also been discussions about the extent to which the DCEP could offer the technology and efficiency that could, in future, help to internationalize the yuan — for example, for transactions with partners in China’s Belt and Road Initiative.
However, the digital asset in isolation is unlikely to be a silver bullet for significant yuan internationalization and, by extension, for the erosion of the dollar’s hegemony — unless its rollout coincides with other policy shifts and changes in the geopolitical balance of the global financial system.