In April 2020 a grainy screenshot of China’s sovereign digital currency, DCEP (short for Digital Currency/Electronic Payments) or the Digital Chinese Yuan (DCNY), was leaked online. The image showed a wallet for the DCNY provided by the Agricultural Bank of China, with payment functions, QR codes, and the ability to tap phones together to pay offline. While the People’s Bank of China (PBOC) had started researching digital currencies as early as 2014, the screenshot was the clearest indication of how far along in the process they were.
Soon after, pilot programmes were rolled out in a few major cities. In Suzhou, the DCNY was used to pay half of the travel subsidies owed to public servants. In October 2020, more than 47,000 people in the Luohu district of Shenzhen spent 8.8 million yuan (£986,000) during a week-long trial of the digital currency. A total of 1.9 million applicants had signed up to receive one of 50,000 digital freebies – or “red envelopes” – from the government. These packets were each worth 200rmb (£22). During the trial, over 62,000 transactions were made. By May 2020, China had already filed more than 120 patent applications for its official digital currency, more than any other country. In Xiong’an, a new urban centre near Beijing, 19 companies, including foreign brands like McDonald’s, Starbucks, and Subway were invited as participants to test the DCNY. As of July 2021, trial users have created more than 20 million digital yuan wallets and executed over £3.6 billion worth of transactions with the new CBDC.
According to the PBOC, the aim of rolling out the DCNY was to protect its monetary sovereignty after the popularity of Bitcoin and other cryptocurrencies posed a threat to China’s capital account management. A centralised digital currency was also believed to help enhance the efficiency of payments systems. The PBOC also hoped that, unlike current digital platforms, the DCNY could be designed to promote financial inclusion – for instance by allowing for offline payments, which would expand digital payment capabilities to the elderly or those without a smartphone. Critics, however, have argued that the aims of the DCNY are more sinister: that it is a tool for increased government surveillance, giving the CCP a window into every transaction made in the country. It has also been argued that the DCNY represents a deft technological move by the government to subvert the US dollar’s primacy as the global reserve currency, and with it destabilise the financial dominance of the US.
While still in its infancy, these pilot programmes taken together with statements from the PBOC itself show the extent to which China is powering ahead with its own central bank digital currency (CBDC), at a time when the rest of the world is just starting to tentatively explore the future possibilities for their own economic systems.
While many countries were initially sceptical of China’s plans to create a digital currency when it was first mooted in 2014, the pace with which China has started to move with the DCNY has prompted many major economies to start seriously considering their own response. According to research from the Bank of International Settlements, 86 per cent of the 60 central banks they surveyed are now exploring CBDCs, and 40 per cent are already building proofs-of-concept. A CBDC is a digital version of a fiat currency. More than 88 of CBDC projects, at pilot or production phase, use blockchain as the underlying technology. However, unlike cryptocurrencies which use blockchain as a way of maintaining anonymity and decentralisation in the system, CBDCs rely on a centralised ledger. This means that Central Banks are able to access an incredibly rich seam of data about the financial transactions of their populations – data that otherwise would not be captured by existing systems or would require going through intricate proxies.