China’s Digital Yuan is imminent with reports suggesting the token could be trialled in four cities in the nation next month. With major companies backing the token’s research and others coming on board with its project implementation, the magnitude of the currencies importance can’t be understated.
Since the rumours of its announcement, Asia Crypto Today has been at the cutting edge of the news with regards to the token- which is often referred to as a central bank digital currency (CBDC) or a digital currency electronic payment (DCEP). Here at ACT, we have decided to create a complete guide on China’s new currency. Feel free to use the table of contents to refer to each section.
What is China’s DCEP?
China’s DCEP is a centralized digital currency that will be available through a wallet app. Said to be one of the first of its kind, it will be backed 1:1 with China’s national currency, the Renminbi (RMB). Unlike cryptocurrencies, the technology behind the token is not blockchain, but rather a variety of technologies. This is due to the slow transaction speeds blockchain technology brings. However, it is important to note that blockchain is an integral part of Chinese governance and technology, with the nation also announcing a blockchain service network in April. 45% of the world’s patents related to the technology filed to the World Intellectual Property Organization (WIPO) coming from China.
The currency will have two usages. The first will be for commercial use, namely for retail and other day to day usages. The second is for internal bank transfers. The current system is too slow and it is hoped that the new currency will help with this issue.
Who created the currency?
Created primarily by the Chinese state bank, the People’s Bank of China, through its research group named the Digital Currency Research Institute which they set up in 2017. Headed by Changchun Mu, the institute’s 996 staff members have worked fast to create the currency since his appointment in September 2019. However, that is not to say that the currency has not been a collaborative effort.
Other state banks are all linked to the token. Tech giants Alipay and 22 other companies like Tencent, Huawei and China Merchants Bank are all reportedly helping the research and implementation effort. Alipay released five patents related to the token between January 21 to March 17.
Where will it be tested?
According to local media reports, the currency will be initially tested in four cities across China. These include Shenzhen, Xiong’an, Chengdu and Suzhou. The trialling is said to last between 6-12 months. Testing will begin in Suzhou in May, with transport workers receiving 50% of their subsidiaries in the token. Xiong’an, will have a catering and retail company focus. Beijing and Zhangjiakou are expected to be the next cities to test the currency.
There are a number of institutions which will pilot the token on their own platforms. Other state-owned banks to initially test the project are the China Construction Bank, the Agricultural Bank of China, Bank of China and the Industrial and Commercial Bank of China. Telecommunication companies are also testing the currency, these include China Mobile, China Telecom and China Unicom.
Where can the currency be used?
As it is a retail token. Companies will also have been integrated and many have taken up the task. The most notable names on the 19 long list were US companies McDonald’s, Subway and Starbucks. Other applications for the future include transport, education and medical services.
How to use the DCEP
Other major companies have pledged to give users the ability to access the token. The Chinese government declared that all payment providers like Apple pay, Wechat and Alipay must have the token onboard. Chinese phone company Huawei is also one of the first to sign up to the token, with leaked reports showing the Huawei Pay app and access to withdraw the DCEP. Please note: the currency is not available on exchanges and should not be confused with Tether’s CNHT token, which is also backed by the RMB. It is not for speculation and should not be seen as a stable coin or decentralized like Bitcoin
As previously mentioned, the DCEP will have its own wallet app. Although nothing can be said before it is tested officially, the screenshots leaked by the Agricultural Bank of China of the app does reveal some features. Bank of China and other payment institutions also saw their own version of the app leaked to social media.
From the screenshots, it would suggest that the DCEP wallet will support several major functions including digital asset exchange, wallet management, ability to look up past transactions. Other functions include payment via QR code, remittances and mobile payments.
One interesting feature that the currency’s wallet will have is the usage of NFC (near field communication) based payment options which don’t require devices to be online during the transfer. Not only that but, reports have also suggested that a bank account may not be needed to hold the currency, although this is yet to be confirmed.
Why did China create the DCEP?
Although research into the currency had been ongoing for a number of years, the project received a huge boost from the top when leader Xi Jinping spoke at a Politburo meeting in October last year, telling party members they needed to “embrace digital finance” and blockchain in order to get an “edge over other major countries.”
Research institute leader Mu also gave his reasoning for the currency’s creation, saying: “It is to protect our monetary sovereignty and legal currency status. We need to plan for a rainy day.”
Another reason could be to offer a direct challenge the dollar dominance and hope they can be the leaders in this field before the US can innovate. This is the fear for Mark Zuckerberg, Facebook CEO, who voiced this concern at his congressional meeting for his Libra Cryptocurrency.
Future of the DCEP
With testing underway, many had assumed that this would mean a full roll out of the currency should arrive by the end of the year. However, in an interview on the 26th May the People’s Bank of China governor has suggested otherwise, saying that patience should be had with regards to the DCEP. Speaking to China Finance, Yi Gang said: “[The tests] don’t mean the official launch of a digital yuan” and “there’s no timetable for an official launch”.
Quite what the implications of the currency remain to be seen. For many, the currency represents a growing shift in Chinese dominance and is a direct threat to the US hegemony. Champions of this argument are buoyed by the rumors of the token being rolled out across the Chinese Belt and Road initiative, potentially targeting the 70 countries apart of the scheme. More concern for the US would be the various other adversaries turning to cryptocurrencies, certainly, this is something which could prove to be a problem for Trump’s America.
Latest DCEP Trial (Lottery-style)
The digital RMB has been trialed through a lottery-style airdrop for the Shenzhen’s citizens. Nearly two million people signed up between 9-11 October. However, only 50,000 were able to win a respective sum of 200 yuans ($30) on October 12.
The down side is that these funds come with restrictions. They can only be used in over 3300 designated shops and not everywhere. All winners were instructed to download the “official Digital Renminbi App”, available for both Android and iOS devices.
Update: This post was updated on 14/10/2020 to add the latest trial of the DCEP, which was held in Shenzhen in a lottery-style airdrop distribution.