Global News Insider

As from the recent leakage it became evident that China will soon launch its own digital currency.

The Central Bank of China announced at the end of April that it would carry out a closed test of central bank digital currency in four cities in China starting from May, 2020. This will be the first large central bank to issue its own digital currency directly. Experts believe that since China’s digital yuan is only the digitization of paper money, users will not use them for other purposes and therefore its issuance could not really change the rules of the international currency game. In the short term, the US dollar will still dominate the world currency.

People’s Bank of China’s Institute of Digital Money announced on April 20 that the central bank has studied the digital currency for six years and would conduct a closed test for the first time in Shenzhen, Suzhou, Chengdu and and in Xiong’an New district which is the satellite city of Beijing.

In Suzhou, the government will use digital currency to give civil servants half of their transportation subsidies starting in May. Government employees will load the central bank’s digital currency app this month.

In the Xiong’an New District, a satellite city of Beijing, most of the participating entities are retail companies, including Starbucks, Qingfeng Baozipu or McDonald’s.

The Central Bank’s Digital Research Institute stated that the the aim of this pilot test was to prepare for the Beijing 2022 Winter Olympics. The current closed test will not affect the commercial operation of listed institutions, nor will it affect the RMB issuance and circulation system outside the testing environment.

Paper RMB banknotes fading away?

The English abbreviation of the central bank’s new digital currency is DCEP, which is Digital Currency Electronic Payment. In short, this is an electronic version of the renminbi, issued by the central bank of China.

According to the definition of the central bank’s digital currency by Mu Changchun, the director of the People’s Bank of China’s Digital Currency Research Institute, “its functional attributes are exactly the same as banknotes, but only in the form of digitization.”

The central bank’s digital currency will adopt a two-layer operating system. The upper layer is the central bank, which will issue digital currency to commercial banks and provide credit guarantee for the currency. The commercial banks will then issue the currency to the public.

The concept of digital currency was proposed by the then president Zhou Xiaochuan in 2014. After Facebook announced the launch of Libra, a digital wallet cryptocurrency in June 2019, the central bank has greatly accelerated its pace of research and development of China’s digital currency and competed with Libra for the digital currency market.

As a virtual currency, Libra is built on the concept of blockchain. The concept of blockchain was proposed by the Japanese economist Satoshi Nakamoto after the financial crisis in 2008. Its essence is a decentralized database, that is, currency and government control need to be separated.

Mu Changchun, deputy director of the Payment and Settlement Department of the People ’s Bank of China, said that when the People ’s Bank of China digital currency research team first studied the central bank ’s digital currency, it made a prototype that completely adopted the blockchain architecture. However if based on existing technology, it could not achieve high level of performance at retail level. Therefore, in the end, the central bank will remain technologically neutral, without presupposing a technical route or relying on a certain technology.

User experience will be the same as when using banknotes

Experts pointed out that since this is only the digitization of paper RMB, for ordinary users, they will not feel particularly difference in using digital currency.

“I don’t think it will be any different from our usual Paypal, WeChat payment or Ali payment used by Chinese people,” says Lawrence White (professor of economics and an expert in monetary policy at George Mason University White). “In terms of users using such convenient payment methods, digital currency is not a real game changer. China’s purpose seems to be to eliminate banknotes.”

For ordinary users, in addition to WeChat Pay and Alipay in their mobile phones, there may be one more App of Bank of China.

The real changes happen behind the scenes. The settlement of the financial system and banks may be more efficient due to the use of digital currencies, but the specific operations will not be known until the digital currencies are actually introduced.