China is establishing a digital currency, which will function like cash.
According to the Financial Times, the People’s Bank of China (PBOC) has released 84 patents and is speeding up plans to launch a system of electronic payments in digital currency (DCEP).
The patents filed focus on the “design of protocols” that will control the issuance and supply of digital renminbi, as well as the frameworks for the execution of interbank settlements and the integration of the Central Bank’s Digital Currency (CBDC) with the infrastructure existing retail banking in China.
In addition to various protocols, PBOC also intends to develop a digital token that will presumably be exchangeable for the actual Yuan currency.
It is the first time that a country has committed itself to creating a national cryptocurrency, and governments and banks around the world are accelerating their pace to have a place on the podium of this new market.
Let’s see what we know so far about this currency and what are the possible implications for the market.
According to Seeking Alpha, the nation has made significant progress in developing the cryptocurrency.
Although we do not know yet when the currency will be implemented, we know for sure that it will play an important role in helping fintech expansion in China.
It seems that the Chinese digital currency will be issued similarly to cash, distributed by central banks to customers. The digital currency will be distributed to users and companies through digital wallets registered by the Central Bank. In this way, the digital currency system will not drastically reduce the role of banks in the Chinese economy, as many have feared from the appearance of crypto currencies.
In fact, Bitcoin, which was released worldwide by the mysterious Satoshi Nakamoto in 2009, is based on a techno-utopian vision of a decentralized global currency that would provide anonymity and security, allowing users to subvert the consolidated financial system and its supporters. The basis of this technology is the blockchain. Due to its nature, the system is decentralized and uncontrollable, and for this reason it has raised several controversies in recent years.
The development of the new Chinese currency system seems to reach a further stage. China is in fact working to guarantee stability, security and control in the system. The currency entered a testing phase in late 2019 in applications related to transportation, education and healthcare. For the test, the Central Bank cooperated with seven state and telecommunications banks: ICBC, Bank of China, China Construction Bank and Agricultural Bank of China, China Telecom, China Mobile and China Unicom.
One of the purposes of digital currency is to improve the traceability of money and make the process of cross-border transactions easier thanks to the cooperation between banks and tech companies, which will build their own technological ecosystems around the currency. Some of these systems will use the blockchain to track funds, while others will use more traditional methods. This will encourage the use of technology not only among financial companies, but also among individuals, who will have to register for a digital wallet in order to use the new currency.
China is already a highly digitized country when it comes to payments. The two dominant payment systems, Alipay and WeChatpay, are omnipresent across China. Alipay has over 900 million users and WeChatpay over one billion. As a result, Chinese use of digital currency should not be difficult for citizens to use and it is likely that it will further expand the use of digital wallets.
There are many concerns, raised mainly by the United States, related to the use of a Chinese cryptocurrency. The dominant topic is money laundering, followed by the inability to track transactions and therefore the possibility that China will use cryptocurrency to finance North Korea.
The controversy arose from a statement by Mu Changchun, head of the People’s Bank of China’s digital currency research institute, at a conference in Singapore. “We know that the public’s request is to remain anonymous by using cash … we will give anonymity in their transactions to those that request it.” This claim raised concern that the Chinese currency could be used for money laundering.
The Chinese government has assured that the Chinese digital currency will be unified in a similar way to cash, as issued by the central bank, but all transactions will be traceable. This will allow the authorities to track the direction of transnations, both overseas and in North Korea or towards possible criminals in China. The system should be able to distinguish between daily and potentially criminal transactions.
We just have to stay and watch the next developments, in China and in the world of cryptocurrencies in general.