/China Set To Launch Own Digital Currency

China Set To Launch Own Digital Currency

Although it’s often stated that the Digital Currency Electronic Payment (‘DCEP’) China is set to launch later this year is the country’s reaction to Facebook’s Libra, the ‘digital yuan’ has been in development since 2014. Here’s an overview on what we think is bound to happen, just a few days after China trimmed the weighting of the U.S. dollar, while simultaneously adding to the weighting of the euro. 

According to Changchun Mu, the head of the People Bank of China’s digital research subsidiary, the digital yuan will not be used for speculation.

Now, we know you may be reading this newspaper because you’re somewhat hooked on the excitement of investing or trading in cryptocurrency. There’s something exhilarating about watching the value of an unstable coin go up, and – let’s be honest – there’s something addictive about waiting to see it get out of a downfall after a bad day (or minute). It’s a little bit like playing poker – it’s still gambling, but if you know how to read the signs, you stand a better chance of winning than non-educated players. Thus, it should be hardly surprising that some people are airing their disappointment on  social media, claiming there’s ‘no fun’ in what China will be offering.

Which is not to say the country doesn’t know what it’s doing. To the contrary, the authorities have built the DCEP very purposefully to not have the characteristics of bitcoin speculation. It also doesn’t require basket assets to support the value of the currency, which means it will basically act like a private blockchain version of China’s paper yuan, running on a peer-to-peer network, fully backed by the central bank of this world’s second-largest economy and drawing its value from the state’s ability to impose taxes in perpetuity. The new digital currency will operate on a two-tier system, with the People Bank of China on top and commercial banks in the second tier of the centralized system.

While Libra’s value will be pegged to a basket of major world currencies, China changed its own laws in order to be able to get the DCEP out there, launching a central bank digital currency (CBDC). That bank will most probably start issuing DCEP to Chinese citizens using commercial partners, including Ant Financial (which is backed by Alubaba) and Tencent.

Obviously, privacy concerns are rampant, with critics expressing concern China might be able to use its digital currency to increase surveillance on its own citizens. In order to alleviate their misgivings, Mu has said the bank will guarantee cash-levels of privacy – and, obviously, we all believe Chinese officials when they start soothing us. Even when they tell us they’re not launching a war on (foreign) cash. Great. More power to them, but China’s digital token is most certainly set to challenge the United States dollar.

It is expected that the pilot project will consist of a gradual implementation in the provinces of Hebei and Zhejiang, as well as in Shenzhen City, with 4 major banks and economic participants (such as China Telecom) amongst the first test entities. After China, Africa might very well be the next roll-out region, as the continent has, for the most part, been on good terms with the ‘capitalistic communist’ government.

If you’re a Chinese politician, launching your own cryptocurrency is a great idea – one which is bound to be implemented by other rich nations sooner than later, especially with the European Central Bank also researching its own cryptocurrency. Even though the digital yuan is bound to start out small, it definitely has the potential to disrupt traditional banking and the floating exchange rates we’ve come to know since 1973. By providing a national digital currency that isn’t encumbered by ledgers (repositories of irrefutable records to establish trust in situations where it doesn’t exist), the productivity boost could be a lot more significant than some observers had initially expected. Digital currencies like this are able to bypass the system of deposit-taking lenders, with the central bank profiting both as deposit-taker and as lender. That makes sense, as traditional lenders are currently starving, since the central bank charges them for keeping money on deposit.

With all this going on, you might ask yourself why the possible implications of the digital yuan haven’t seen a lot of press. Truthfully, we have no idea. Maybe the concepts are too difficult for many of us – including journalists – to truly understand in-depth, or maybe we figure we have quite a lot of time left before the DCEP will appear on the marketplace.

The Chinese invasion can begin.