The COVID-19 crisis has done little to dampen China’s interest in becoming the first major economy to distribute a central bank digital currency. On the contrary, the digital currency / electronic payments project seems to be moving faster.
For example, in the Shenzhen region, 100,000 local citizens received a total of $ 31 million digital yuan through lottery for free this month, and now residents can use ATMs to convert digital yuan into cash on a test basis.
Meanwhile, the Postal Savings Bank of China Reportedly developed physical wallet cards to store digital yuan, something useful for the elderly who are not always familiar with electronic currency. The government, which appears to cover all contingencies, recently engaged the payment platform Alipay to build digital yuan systems in the Shanghai region.
Why so much in a hurry?
Kevin Desouza, professor of business, technology and strategy at Queensland University of Technology, told Cointelegraph, “China is accelerating the pace of development of its CBDC. Simply put, they see this as a critical competitive advantage in the digital economy. Given the nature of China’s markets and governance and its determination to gain a first-mover advantage in the CBDC race, “we can expect China to triple this effort in the future.”
Eswar Prasad, a professor of economics at Cornell University and a senior fellow at Brookings Institution, told Cointelegraph, “China has made significant strides in establishing and refining the design and conceptual frameworks for its CBDC” and has “the shift from physical to digital versions. of retail money from the central bank that are much closer to reality. “
When the digital yuan is fully rolled out, it will be used as a M0 currency, that is, as cash in circulation like coins and banknotes, according to to an official of the Peoples Bank of China. Preparation was extensive, with 2020 pilot tests in four regions – Shenzhen, Suzhou, Xiong’an and Chengdu, plus the Winter Olympics – while the 2021 agenda calls for tests in five regions: Shanghai, Hainan, Changsha, Qingdao, Dalian and Xi’an. In these test areas, the emphasis has been on usability, according to at the Beijing Review.
A key phrase from the report said that “both cell phones were offline.” China’s digital yuan does not require an internet connection, which is considered critical in a country where many remote areas still have no or spotty internet access.
Challenges such as interoperability and privacy remain
However, China has not solved all the problems associated with a CBDC. “There are still important issues to be addressed in terms of scalability, interoperability and transactional privacy for users of the DC / EP,” Prasad told Cointelegraph.
Yu Xiong, international associate dean at Surrey University and chair of business analytics at Surrey Business School, told Cointelegraph, “There will be some technical issues before the full rollout takes place, but the main issues have already been addressed in the testing period.” The question of usability has been largely resolved.
Chinese consumers are flexible when it comes to adopting new payment methods, and the digital yuan wallet is expected to be similar to the wallet already widely used in China on non-bank payment platforms such as Alipay or WeChat Pay, Xiong explains. from. Users will download digital yuan wallets to their smartphones where the digital currency can be stored. “All major online trading and communication platforms will follow, so the infrastructure will not be an issue,” he added.
Crucially, a user doesn’t need to open a bank account to get started – just give up a unique form of identificationsuch as a driver’s license or a cell phone number. A digital yuan would be an event of some social importance to China, Xiong said, as it could bring many poor people into the financial system and alleviate poverty.
Elsewhere, China is already largely cashless, so a digital yuan won’t cause dramatic changes in retail. But as for the reasons beyond social justice as to why China is so committed to a digital yuan, Desouza told Cointelegraph:
“The reason for China’s investment in this is to increase the credibility and universality of their currency. Today, the yuan is not seen as a major currency. However, in the future, they see the CBDC taking a leading position in the digital currency market. ”
There is also a practical reason. Desouza suggested that a CBDC would give the central bank more options to monitor and control the flow of money between citizens. Indeed, a digital yuan appears to be a double-edged sword. Allowing the government to monitor the flow of money could be useful in fighting corruption, as Xiong noted, and would also “help the government control the financial system and reduce the likelihood of a financial crisis”.
A digital yuan could mitigate certain investment risks, such as if the government continued to build gigantic housing complexes in so-called “ghost towns” – ie, under-occupied buildings.
But perhaps these benefits come at the expense of sacrificing privacy and even some basic freedoms. Political critics or dissenters could be more easily denied access to the financial system if all flows of money could be tracked – as they could with a CBDC.
During recent protests in Hong Kong, protesters waited in long lines to buy subway tickets with cash – fearing authorities would otherwise track them to the demonstration site and take punitive action, Marta Belcher, a Ropes & Gray attorney, told Fortune magazine, adding, “A cashless society is a security society.”
Sidharth Sogani, CEO of crypto and blockchain research firm Crebaco, even sees a Bitcoin (BTC) aspect in China’s pursuit of a digital yuan. He believes that China has not shifted to decentralized crypto, but that the software, hardware and mining industries have been able to grow. “Currently, a majority of Bitcoin is mined in China, so I see an ulterior motive behind being aggressive with their CBDC. Perhaps it would allow China to trade BTC more efficiently, ”he told Cointelegraph.
Can it be replicated elsewhere?
At this point, the PBoC has gathered a huge amount of data on how consumers would actually use a digital currency. The central bank provided employees in a hospital in Shanghai with the aforementioned plastic cards containing digital yuan, for example to order meals in the company restaurant; and in early January, Alipay tested the digital yuan in a shopping mall in Shanghai and placed signs in beverage stores where consumers could use Alipay’s usual scan code feature – only here by selecting a yuan payment option. Will other countries now draw on China’s experience building their CBDCs?
A DC / EP-like project could be reproduced elsewhere, Xiong said, but it would take time to be accepted, as with mobile payments. China can quickly adapt to the new payment method as its banks and e-commerce platforms can be easily synchronized. As Xiong explained for Cointelegraph:
“But most western countries could not smoothly enforce a new policy / new technology. Thus, the DC / EP model will be implemented in China first, and other countries will gradually have to grow users and infrastructure, which will take time. “
Is the US hesitating?
Does it really matter if China enters the market first among major economies with a digital currency? The Bahamas, a small West Indian country, launched the first CBDC available to all residents in October – so China won’t be the first country. “In CBDCs, it will have the first-mover advantage,” Sogani said. ‘Like a US. [digital] dollar comes after two years, then they can lose the market. “
Others are not so sure. “It will hardly make a dent in the dollar’s status as the dominant global reserve currency,” Prasad told Cointelegraph. “The dollar’s strengths lie not only in the depth and liquidity of the US financial markets, but also in the institutional framework that supports the currency’s status as a safe haven.”
Neha Narula, Director of the Digital Currency Initiative at MIT Media Lab, noted in November: “They can see all the payments people make and collect information about all those payments. That is – [it] perhaps makes sense in China. But I don’t think that makes sense in the United States … and we have to think about how to design the system, so that’s not the case. “
In short, even though China is already a cashless society, especially in its cities, it continues to methodically roll out a central bank digital currency on a scale not seen before, both for internal reasons – such as broader social justice and opportunity to exercise greater financial and political control – but also because it realizes, arguably, that global leadership means having a world-class currency and that the DC / EP project is the fastest way to get there.