China is finalizing its plans to roll out a central bank digital currency (CBDC), with trials presently underway. The nation has been exemplary in its continued efforts to adopt fourth industrial revolution (4IR) technologies apart from cryptocurrencies, which is still a work in progress, making the introduction of the Digital Yuan all that more fascinating in the world of Industry 4.0.
Experimental, Novel, New
Physical money has been slowly dwindling in usage, in fact cashless/digital payments have unstoppably become the dominant method of payment, which was to be expected with the proliferation of mobile banking apps, contactless debit cards, and so on. Though for a government to officially issue its national currency in digital form is an extremely new concept that appears to make total sense. If we are paying digitally, why isn’t our money digital?
The Bank of England was one of the earliest organizations to flirt with the notion of CBDCs, and even now Sweden is conducting tests of its own CBDC, the e-krona, which will be based on blockchain technology. However, the aim of the e-krona is not to replace cash, but to complement it.
China, despite its ban on cryptocurrencies, which was somewhat reversed or is presently reversing, is moving full steam ahead with the testing of its CBDC project, which in China is officially dubbed as a “digital currency electronic payment” (DCEP).
Ironically, the governing body behind the creation of the CBDC, the Digital Currency Research Institute, was set up on 2017, the same year that the People’s Bank of China (PBoC) had ordered all commercial and financial entities to cease handling cryptocurrencies, as well as banning initial coin offerings (ICOs) at the time.
In this short time, the institute put together around 1,000 staff members to create the new digital fiat currency. Reportedly, the currency has two uses, commercial and everyday uses, as well as internal bank transfers. It is hoped that the Digital Yuan, which will be backed 1:1 by China’s national currency, the Renminbi, will boost the speed of the nation's legacy banking systems.
Regarding the technology backing the DCEP, it is somewhat clear that blockchain will not be the foundation for it, rather, a number of technologies. Though this is ambiguous, it is worth noting that China leads the world in blockchain-related patent applications, and has introduced blockchain into its online government services.
China’s foray into digital transformation is unprecedented as they are leading the world in terms of smart city development, blockchain adoption, IoT, DeFi investment, and so on.
According to Jay Hao, the CEO of OKEx, one of the world’s biggest Bitcoin/cryptocurrency exchanges, the DCEP being a 100% state-backed digital currency makes it a far more tangible digital currency, unlike decentralized currencies like Bitcoin, or stablecoins like Tether (USDT), which have troubles when it comes to payment processing or even adopting the technology. With the DCEP, it’s legal tender, and merchants cannot refuse DCEP payments.
In an interview with Hackernoon, Hao also noted that DCEP opens up the doors for financial inclusion, further increases anti-money laundering and tax evasion crackdowns, decreases terrorist funding and improves financial service quality for those in “underdeveloped and remote areas.”
Naturally, the CBDC needs to be tested out in the field, and so far, China has put together a roster of participants and locations including several state-owned banks who will also be partaking in the experiment as well as telecommunications companies, this is likely to establish solid network infrastructure.
Furthermore, a list of commercial participants, including western companies like McDonald’s and Subway are part of the test. This is wise, as they are enterprises that deal in huge levels of transactions and if anything, reveal whether or not the infrastructure of the CBDC is ready for such adoption.
The CBDC is to be tested in four major cities across China, namely Shenzhen, Suzhou, Chengdu, and Xiongan New Area. Reportedly, the cities that they are being tested in were carefully selected as they reside on the outskirts of Beijing as part of the “smart city brain project.”
Xiongan New Area will most certainly be one to watch, as this is a city with highly advanced infrastructure being developed in it. 4IR technologies such as 5G networks, IoT, blockchain, and big data facilities will be the foundation on which this super city will operate, primed for the introduction of a CBDC.
In the coming weeks, we’ll have a better picture of just how well the CBDC has performed, especially amid the COVID-19 crisis, as China slowly begins to upstart its economy again, slowly returning people back to work.
Though China’s CBDC has been a great point of contention for economists around the world, as they believe the introduction of the Digital Yuan challenges the dominance of the U.S. dollar.
Whilst the project has been in the works for some years, it received a boost of confidence in 2019 from China’s leader, Xi Jinping, who spoke of embracing digital finance and blockchain in order to gain an “edge over the other major countries.”
As seen with cryptocurrencies, and even in the case of Venezuela’s state-backed cryptocurrency, it seems that the development of CBDCs with all the functions of a traditional currency is a mammoth task. Creating the currency alone is not enough, it needs to be proven to work just as well as the traditional economic ecosystem, and if not, perform far better, and that is how it will be accepted by its people.