In the first of this two-part series recognizing the one-year anniversary of the unveiling of China’s digital currency, Forkast.News examines the milestones that the digital yuan has achieved in the past year. Part II looks at the influence the DCEP digital yuan — still in the testing phase — could have on international trade and the world’s banking system.
Almost exactly one year ago, a small number of residents of Xiangcheng District in Suzhou, began using subsidized digital currency to pay for their transportation. That day, April 17, was the start of the first test of China’s ambitious central bank-backed digital currency (CBDC).
With a leaked screenshot circulated widely online, it was the world’s first glimpse of the digital currency/electronic payment (DCEP) wallet. In the 12 months since, the People’s Bank of China (PBOC) has completed at least six more rounds of large-volume digital yuan testing in pilot cities Beijing, Shanghai, Shenzhen and Chengdu involving 700,000 people. The bank examined different versions of DCEP wallets, ranging from smartphone apps, bank card-like hardware wallets and wearable wallets. It even began testing cross-border payment transactions. Through this process, the PBOC has been able to provide more clarity on the design and features of DCEP, known officially as electronic Chinese yuan (e-CNY).
China’s speedy DCEP progress has attracted the world’s attention. In April, major western news outlets reported on the development of the digital yuan as the first major government-backed digital currency. But many questions remain. In a two-part series, we take a closer look into it. First, we examine the current stage of DCEP, the timing of its potential launch, and new clarity provided by PBOC.
Although the PBOC has offered no timetable for the official launch of DCEP, China watchers believe it may kick off with the Beijing Winter Olympics in February 2022.
“The Winter Olympics in Beijing is the perfect time to showcase to the rest of the world how China is leading the race for virtual currency,”said Matteo Giovannini, a senior finance manager at the Industrial and Commercial Bank of China (ICBC).
As China is testing wearable DCEP hardware wallets, such as those embedded in ski gloves, Xinhua news agency has reported that DCEP wallets and payment options will be provided to the athletes, coaches and even attendees during Beijing Winter Olympics.
“I expect most of the major stores and restaurants in Beijing and surrounding Olympic venues will be gearing up to accept the DCEP,” said Stanley Chao, managing director of All In Consulting and author of “Selling to China: A Guide for Small and Medium-Sized Businesses.”
“I guess you can call it the official grand launch of China’s DCEP not just in China but to the world, as the PBOC plans to distribute red packets to all Olympic participants and even tourists,” Chao told Forkast.News. In February, Beijing issued 50,000 DCEP red packets including 200 digital yuan each to Beijing residents to stimulate purchases related to the Winter Olympics, like sports equipment and clothes.
More recently, DCEP hit several milestones. For the first time, ordinary Chinese citizens are allowed to open digital yuan wallets in six state-owned banks around the nation — Bank of Communications, Postal Savings Bank of China, Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and the Bank of China — without requiring an invitation.
During the first seven DCEP trials, only people who won lotteries would be invited to open a DCEP wallet and participate in the DCEP testing. Now individuals can put themselves on a waitlist at the six banks and be approved to get a DCEP wallet.
In addition, not only Mainland China citizens, but now Hong Kongers are eligible too. According to Guangzhou Daily, Hong Kong residents are able to register digital yuan wallets via their Hong Kong phone number and use digital yuan in retail stores in the Luohu District of Shenzhen.
Digital yuan are also being tested in business-to-business cases. In March, two fuel oil trade enterprises used DCEP wallets for the settlement of transactions in Dalian, a port city in Liaoning province in North China. Those were the first business-to-business transactions using digital yuan.
DCEP comes into focus
Recently, the PBOC disclosed more details of the operation, design and function of DCEP.
DCEP is not 100% anonymous, said Mu Changchun, director of the Digital Currency Research Institute of the PBOC. He spoke at the China Development Forum, a high-level forum in March for Beijing’s senior officials and global business leaders. The DCEP wallets will allow for “controllable anonymity,” said Mu, as reported by Yicai, a finance newspaper. On the one hand, DCEP needs to protect the public’s privacy, on the other hand, it also needs to control risks and combat money laundering, terrorist financing and tax evasion, Mu explained.
In order to achieve “controllable anonymity,” DCEP wallets have tiers of complexity based on the degree of KYC (Know Your Customer) needs.
For example, the most anonymous digital yuan wallet, which only requires a cell phone number for registration, can only make small payments. If individuals want to make bigger transactions, then they would need to upgrade their digital yuan wallets to have more KYC verification measures, and the wallet balance and payment limitation will increase as necessary, according to Mu.
In addition, Mu stressed that DCEP will not replace current third-party payment methods — Alibaba’s Alipay and Tencent’s WeChat Pay, which together represented 98% of the mobile payments market in China — but will co-exist with them. Mu said this at a panel discussion hosted by the Bank for International Settlements in March.
Co-existing with AliPay and WeChat Pay means DCEP needs to convince consumers they need another digital wallet alongside the third-party payments they already have.
“It’s going to take a big marketing and education program from Beijing to help consumers, especially those consumers living in the countryside that are not technologically savvy and rely heavily on cash, to understand the advantages of the DCEP,” said Chao.
China is leading the race to a national digital currency with progress that no other major economy has achieved. What does this mean to the rest of the world, especially, for the U.S. and the U.S. dollar, a global standard? In the second part of this series, we examine China’s expanding influence in the world through the digital yuan.
