In many countries, the retreat of cash in daily uses has led to new digital forms of money. As we have seen, the private sector has been grasping the opportunities provided by the decreasing demand for cash. Paypal, Alibay, PayTM, Bitcoin, etc. are all products of the digital economy. However, concerns over the solutions provided by the private sector have led to the question: should the role of the state be limited to regulation or go beyond with a more active role?
China has clearly taken the second path, with its "Digital Currency Electronic Payment (DCEP)" project led by its central bank, the People’s Bank of China (PBOC). How does the Chinese digital currency work and what are its global implications? Eric Chaney, Economic Advisor to Institut Montaigne, and Viviana Zhu, Policy Officer at Institut Montaigne, address the issue.
China will be the first large country to launch a government sponsored digital currency. Concretely, how is this going to work? Is China’s digital currency push part of its surveillance need/desire?
PBOC had an early start in the study of a government-backed digital currency. The DCEP project has been launched in 2014. In 2017, the digital currency research institute at the PBOC was established to focus on the issue. The central bank only revealed the status of the digital currency study to the public last summer. The move is officially explained by the need to protect China’s sovereign currency and against the current and potential form of digital forms of money. The other factor, underlined by Huang Yiping, director of the Digital Finance Research Center of Peking University, is indeed the birth of Libra, which served as an "alert". In short, China has to "plan ahead of the rain 未雨绸缪".
Not surprisingly, DCEP uses a centralized management model, but the interesting part is its two-pronged operation system. It means that the PBOC will issue the digital currency to commercial institutions, which will be in charge of the actual distribution. This model, on the one hand, provides an extra layer of guarantee compared to other cryptocurrencies in the market, because it is backed by the central bank. On the other hand, it allows the effective use of available resources (including human resources) and technology in the market, which can serve as a way to diversify risk.
According to Mu Changchun, head of the PBOC established in 2017, the planned digital currency has the same characteristics as physical cash. This means that payment with the digital currency cannot be refused, no interest will be offered for the digital currency stored in consumers’ e-wallets, and its value equals to that of China’s legal tender, RMB. Different from the other digital forms of money provided by the private sector, the DCEP belongs to the stable coin genus and is a liability for the central bank. The technology to be used remains unclear, but President Xi Jinping’s endorsement of blockchain research and innovation, during a Politburo study session in October, was interpreted as a signal that the DCEP will be based on a weak form –i.e. centralized versus decentralized—of blockchain. Nevertheless, the official statement stresses that PBOC is open to all options, provided that they can process 300,000 transactions per second. What is also open, is the timeline of the project.
As a substitute for physical cash, no account is needed for the use of the digital currency. A charged phone with your e-wallet is all you need to make the transaction happen. No internet connection is required. Although how one’s e-wallet will be obtained or issued is not clear, some restrictions on its anonymity have already been outlined. There will be a transaction limit on one’s e-wallet, and the more personal information you feed into your e-wallet, the higher the limit gets to. For instance, adding your ID number to your e-wallet will raise your transaction cap, and linking your bank account to it will increase it further.
"Controllable anonymity 可控匿名" is what has been promised to the users of DCEP, while the exact meaning those terms entail is confusing. In short, any transaction may be traced if the government needs to. Daily transactions are anonymized, but if the system identifies suspicious activity, the user can be identified with the help of algorithms designed to extract hidden information from big data. In other words, the level of anonymity will be decided by the government, thus "controllable". Hence, in contrast with what has been promised, the official digital currency will not be a substitute for the physical currency, which use does not require any personal information.