Digital Disruptors

China’s Digital Currency Explained

This video is about, why and how China decided to go digital. What is the Digital Yuan? How does the Digital Currency work? Is DCEP a cryptocurrency? Is the digital Yuan blockchain based?

Video Summary

The nature of money is something that the average person living a thousand or one hundred or maybe even ten years ago spent a very little time thinking about outside of a few major economic crashes.

Money was a relatively constant and predictable thing in our lives, but in the last decade or so, the very nature of it has started to change with digital payments, mobile wallets, cryptocurrency and most recently the first ever attempt at a real digital currency by a major economy. The Chinese government started rolling out its digital Yuan, officially called the DCEP (Digital Currency Electronic Payment) and small pilot projects last year.

China started talking about its own digital currency in 2013 for the first time the same year, WeChat, the country’s most popular messaging and social app, launched its mobile wallet, following in the footsteps of Alibaba Alipay. Alibaba’s Alipay was launched in February 2004.

Four years after that is in 2009 Bitcoin was launched. At first, the new digital currency seemed like little more than a side project of the government going through a couple of years of relatively slow research and development phase. But their focus started intensifying dramatically around 2017, leading to the first public trials in 2020 spending for Chinese cities and hundreds of merchants. And the timing of this increased interest is no coincidence.

At the end of 2017, Bitcoin hit its first real peak in valuation, creating widespread awareness for cryptocurrency around the world. In 2018, Facebook announced Libra with bold ambitions to create a cross-border currency for its over two billion users during this year’s mobile wallet exploded in popularity and China online lending through Internet companies ballooned to huge proportions in the country.

And the United States government launched its trade war against China, which increased the risk of financial sanctions. Within the span of just a few years, the entire Chinese monetary system, including its currency and its traditional banking sector, started facing major threats from both inside and outside of the country. Domestically, Tencent and Alibaba, China’s two largest tech companies, started to gobble up the entire finance industry of the country.

Their respective mobile wallets came to dominate the category, and mobile payments skyrocketed in popularity to mind blowing 32 percent of all sales in the country, leading to many merchants simply stopping to accept other payment methods, including cash or credit cards completely. Given their incredible growth, the two are now on a path to swallow up almost all payment in the country within just a few years.

And these two giants were increasingly starting to strike exclusivity deals with more and more merchants, meaning that consumers even now often have no choice but to use their services. Not only that, most giants and group especially also got heavily involved in offering other financial services like loans or insurances on the backs of their wallets. The group has an incredibly detailed picture of its users, including how they make and spend money both online and offline.

Combining financial services with e-commerce and social media profiles in real time create such strong synergies that traditional institutions simply cannot compete with them. And to top things off, a few months back, Jack Ma from the Alibaba Group even expressed in his now infamous speech that he thought the law’s traditional financial institutions have to operate under strict rules on the amount of cash banks have to keep in reserves in order to avoid potential bankruptcy.

The Chinese government was also becoming increasingly wary internationally. In 2019, vice president of the China Center for International Economic Exchanges, explained why he thought the country needed an alternative to the SWIFT system. SWIFT is an organization that handles the communication for the majority of international bank transfers. Basically, most of the time somebody wants to make an international transaction. They send the message to SWIFT, who processes it and sends it to the right recipient.

The system is slow and ancient and the organization does most of its processing in Europe and the U.S. and the U.S. in particular has used Swift in the past to spy on transactions using the NSA. It has ceased transactions between citizens of third-party countries like Germany and Denmark that it had deemed unlawful. China, especially since the start of its trade war with the United States, sees its reliance on the swift system as a major source of danger for its sovereignty and thinks that the system could be used to essentially cut it out of the international financial world altogether.

And finally, China also started getting increasingly nervous about crypto currencies, as on the long term, those could potentially replace the Yuan altogether, leaving no control over its currency in the government’s hand at all. It has banned cryptocurrency exchanges and then the cryptocurrency themselves from being used as money to pay for things in the country. A couple of years down the line, cryptocurrency could become a real danger to their control over the economy.

China decided to turn to the digital yuan project, among other things, starting with its most urgent domestic priorities. It designed the DCEP to specifically combat mobile wallets by giving it not only the convenience of those wallets, but also many of the characteristics of a national currency like the regular Yuan. Digital Yuan is issued by the People’s Bank of China and can be withdrawn by them as well. The value of the two are designed to match. They are supposed to be freely exchangeable. Interestingly, the DCEP is also supposed to be usable even without an Internet connection, just like cash. So two users in a remote part of the country could transact on their phones and their transactions would sync back up once they got online again.

And importantly, the DCEP is also designed to be a legal tender again, just like a cash, meaning that, legally speaking, everybody taking digital payments into the country would have to accept it as a payment method. Once it rolls out a policy. There is no doubt specifically aimed at breaking up the quasi monopolies and which they have built over the years. And DCP intends to be just as convenient to the end user as existing mobile wallets as well. So users could get a mobile wallet from a number of approved financial institutions like banks.

They would sign up for an account with a phone number and then they would pay by scanning QR codes via NFC, etc.. The big difference, of course, is that it’s not Alibaba or WeChat processing the day to day transactions, but the banks, many of which are state owned and all of which are closely regulated.

Jack Ma disappeared from public life completely for over two months. Already, it seems clear that the government prefers to deal with the traditional finance players over the tech companies. Now, these banks will then all have to periodically report all DCEP transactions back to the government, which means the government will be able to see all transactions in the system. It could trace each one back to real human existence or phone numbers are legally required to be tied to real identities in China. It could create similarly detailed profiles of its citizens based on their shopping habits that currently WeChat and Alibaba can. It could simply directly give citizens with a DCEP wallet, money, safe or tax returns or unemployment benefits or whatever.

Earlier this year, the first pilot programs for the currency have started in the country. Citizens don’t particularly seem to care about it, since it doesn’t seem to do functionally anything new over their existing mobile wallets already. The Chinese government theoretically has plenty of unfair advantages over commercial players. While the DCEP cuts out Swift as a middleman, which is indeed important for China, it simply adds the Chinese government as an even more powerful overlord there.

Instead, in its current form, the DCEB is a fully centralized system. For example, the Chinese government on its own can monitor all transactions and it can basically create and destroy money across users wallets as it pleases. While this might work domestically for its own citizens and companies, but any major country would accept doing serious business over it in its current form. International payments and decentralization for now are a big question mark.

The Bahamas and Cambodia technically both beat China by launching their respective digital currencies called the Sand Dollar & Bakong. The Cambodian currency is even block chain based unlike China. Sand dollar might just be the coolest official currency name ever.

The most interesting and definitely most unfortunate example of a country trying and failing to launch a state issued cryptocurrency has to be Venezuela and it is called the Petro. It was announced in 2017 as an alternative currency backed by the country’s vast oil and mineral reserves. While the country’s regular currency was going through some of the world’s worst hyperinflation, it sadly didn’t work.

Video Timeline

0:30 – Nature of Money
1:20 – China’s DCEP and how it started
2:30 – Digital Currency’s effect in traditional banking and Companies
5:42 – Alternative of SWIFT system
9:24 – Government’s interference in the system
11:30 – Pilot Program For Currency
14:00 – Sand Dollar and Bakong

digitalscotland

Editor of DigitalScot.net. On a mission to build a world leading Scottish digital nation.

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