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Recent reports indicate that China could launch its digital yuan in early 2020 and may become the first major economy to successfully create a central bank issued digital currency (CBDC).
Is the digital yuan in response to Facebook’s Project Libra?
As cryptocurrency and blockchain development has accelerated over the past few years, central banks have considered and investigated CBDCs. Global regulatory frameworks have yet to comprehensively account for this emerging financial technology and signs of progression to an actual sovereign digital currency launch have been few.
Facebook’s Libra project acceleration may have spurred China, and other regions, to faster development. Should Facebook launch its own digital currency it could quickly engage many of the billions of users of its social platform, a reach wider than many country’s own fiat currencies. The threat of a technology company’s immense influence on global finance is one that governments take seriously. The Libra stablecoin would be backed by a basket of fiat currencies, but the Chinese yuan would not be one of them.
Nikkei Asian Review points to China’s concerns over the dollar’s global domination and its worries over capital outflow from the country which could be assisted by Libra use. Bitcoin’s increasing use resulted in significant outflow of funds from China in 2015 and 2016.
China’s digital currency project ready for testing
The publication says Fan Yifei, deputy governor of the People’s Bank of China (PBOC), indicated at the end of November that digital yuan development has already seen research stages completed and standards set for a launch.
Weeks earlier Chongqing Mayor Huang Qifan reportedly told a Shanghai forum that the PBOC would likely be the first central bank to launch a digital currency. As reported by Beijing Review, Yifei said in commentary for Yicai magazine in September, “the CBDC will still be the central bank’s liability to the public.” He added “the nature of this liability will not change just because of the physical form of cash is going to be digitalized.”
Beijing Review describes the digital yuan as following a two-tier system with the PBOC at the top and a second tier of commercial banks. The PBOC launched its digital currency electronic payment (DCEP) project in 2014. Recently it appeared that seven banks and internet companies including Alipay and Tencent would participate in the early stages of launch.
Breaking news this week via Caijing Magazine indicates that the PBoC is now ready to pilot DCEP in the city of Shenzhen. Partners for the initial “small-scale” test include four of China’s biggest state-owned banks and China Telecom, China Mobile, and China Unicom. The reporting also suggests that the PBoC has signed a memorandum of agreement with Huawei to collaborate on financial technology research. The pilot looks set to see DCEP used in “real service scenarios” and will be followed by a second, larger, test potentially involving other cities in early 2020 on route to a full launch of China’s digital yuan later in 2020.
Will the digital yuan depend on blockchain technology?
In August a PBOC official, Mu Changchun, speaking at the China Finance 40 Forum pointed to blockchain’s role for the digital yuan saying, “as one can imagine, to issue digital fiat currency in a country as big as China, the employment of pure blockchain architecture cannot fulfill the throughput required for retail usage.” He adds, “eventually, we decided that at the level of the central bank, we should remain technology-neutral and not preset a technology roadmap.”
As per Asia Times Fokast News founder Angie Lau, in its China Blockchain Report, says “it’s likely that this system will have elements similar to blockchain technology, but will ultimately be centralized.” This, in contrast to bitcoin and other cryptocurrencies decentralized and out of government control ethos. Fokast’s China Blockchain Report said the PBOC was just months away from launching its “DCEP platform.”
Nikkei reports that former PBOC governor, Zhou Xiaochuan, said he expected the virtual yuan to be used first domestically and potentially in the retail sector where digital payments are prevalent. Like physical yuan, the digital yuan would be issued by the PBOC to financial institutions before reaching consumers and enterprises. It would be stored via an application and an electronic wallet as opposed to a conventional bank account.
What are the benefits for China?
As well as balancing the potential influence of Facebook in the digital payments landscape and creating an opportunity for China to offset a little of the US dollar’s edge in global finance there are other benefits of a digital yuan for China. Including raising the profile of China and the yuan in the global economy and giving China greater control of international transactions. China’s government reportedly loses oversight of between 5% and 10% of cross-border transfers. A digital yuan also innovates and speeds clearing and settlement systems and could put China ahead when it comes to international transfer timescales.
Fokast’s Lau says the digital yuan will provide “extra liquidity for the RMB so that it’s a competitive alternative to the USD… particularly in emerging markets within China’s sphere of influence.” Only later could it join a “race” with the US dollar.
Digital yuan transactions will also be easier for banks to manage than cash in the economy and more easily allow flows of money to be tracked, potentially aiding the fight against money laundering.
Yang Wang, senior research fellow at the Fintech Institute of Renmin University of China, told the Global Times that “China now definitely comes out at the head of the list when it comes to digital currency technology.”
He believes the technology being developed by the PBOC is much faster than that of Libra and its secure too. Wang expects as many as 2 billion international users of the digital yuan in its first iteration, however he says, “it’s too early to say that digital currencies or other fintech can help China displace the US dollar’s dominant role, not to mention that popularization of China’s digital currencies is very likely to face blocks from the US government or some of its allies.”
