China steps up as digital currency pioneer
The People's Bank of China is blazing a new virtual trail with pilot tests of its national digital currency around the country. Digital Currency Electronic Payment (DCEP), the digital version of the renminbi, will be tested in Shenzhen, Suzhou, Xiongan and Chengdu and at venues of the 2022 Winter Olympics scheduled for Beijing and vicinity.
While many central banks around the world are developing digital currencies, China appears to have the edge due to its advanced digital payments ecosystem. Already 83% of digital payments in China are made through mobile devices, compared with 17% through cash or bank cards.
According to the People's Bank, DCEP will be help to accelerate the move to a cashless society and enhance financial inclusion. It will also give the central bank more control over a payments market that is currently dominated by the private-sector services Alipay and WeChat Pay.
Under the centralised digital currency system, the People's Bank will issue DCEP to commercial banks against equivalent cash or deposits at the central bank. The banks can then distribute DCEP to their customers via e-wallets, providing the customers have passed KYC (know your customer) verification. If the trials are successful, the digital renminbi will become the world's first sovereign digital currency.
Early indications are that the digital yuan will be popular. After China Construction Bank (CCB) quietly added a wallet service using DCEP last month, news of the feature quickly spread among the Chinese cryptocurrency community and media.
Some users succeeded in making small transactions by linking their CCB accounts with the wallet before the bank disabled it, saying that the function was not yet officially available to the public.
Customers who did use the service were able to transfer money out of their CCB account into the wallet and then transfer it to others using a phone number or unique wallet ID. In other words, it is as easy as using PromptPay here in Thailand.
The use of a digital currency will be convenient for the public and provide more efficiency in the financial system. However, there are concerns about civil liberties, as the anonymity of cash will be replaced by a traceable digital ledger that could potentially be used for social control.
The digital yuan will also support China's longstanding efforts to internationalise its currency.
Other central banks including the Bank of Thailand are also working on developing digital currencies that can be used for cross border payments. As the first mover, China may be in a position to set the standards for the global system. The DCEP will also present an attractive alternative to the established international funds-transfer system known as Swift, with lower transaction fees.
Suwatchai Songwanich is an executive vice-president with Bangkok Bank. For more columns in this series please visit www.bangkokbank.com