The lives of millions of Chinese have been interrupted thanks to the outbreak of COVID-19. Simple things, like eating out, shopping, and seeing family and friends are harder to do. Still, the economy needs to continue turning and people need to spend money.

Despite the reliance of digital currencies in China, the People’s Bank of China is taking no chances — over 4 billion RMB worth of new banknotes was sent to Wuhan before Chinese New Year. The transfer of cash between certain provinces has been banned. All returned cash in Wuhan is sterilized by either UV or put under a high temperature, before being stored for 14 days before being recirculated. Even in the city of Guangzhou, all cash circulating in hospitals, farmer’s market, and bus stations, was destroyed rather than cleaned and stored.

Rather than use cash, the Vice President of People’s Bank of China has encouraged people to focus on online and mobile banking for purchases and financial investments. Although it appears that China has the most sophisticated use of electronic payments in the world, China is not yet a true cashless society.

Electronic payment platforms, such as Alipay and WeChat Pay, are based on bank accounts. Each transfer still has a cash flow behind it. So even if physical cash is not used, the cash flow between banks has not stopped. Given how contagious the virus is and how it can live on surfaces, cash could spread the virus and bank employees could find themselves at a greater risk. Like how we may see a faster development of blockchain technology due to the epidemic, it is also possible the development of China’s new digital currency, DCEP, will also be fast tracked. Here’s how DCEP will work.

Digital Currency Electronic Payment

As can be seen from the name, DCEP is a digital currency and electronic payment tool. According to Mu Changchun, deputy director of the Settlement Department of the People’s Bank of China, the functions and properties of the Central Bank’s digital currency are exactly the same as paper currency, except that its form is digital.

What does it mean to digitize a banknote?

Simply put, DCEP can circulate like a banknote, without a specific account, and if you and I both have digital wallets, we can trade with each other.

Although it is a cryptocurrency like Bitcoin, DCEP is endorsed by the Central Bank of China and has unlimited legal compensation. It is the Central Bank’s liability to the public.

Legal indemnity means that no institution or individual can reject DCEP. This rejection does not mean that you do not want to accept money, rather this rejection would mean you do not want to receive money in this form. For example, on the eCommerce platform Taobao, users cannot pay with WeChat wallet as there is no option for it. However, as a legal currency, Taobao cannot reject DCEP, and DCEP must exist as one of the payment options.

Wherever electronic money is available, DCEP can be used for that payment.

Replace M0

Unlike third-party payment platforms, DCEP is intended to replace M0, the currency in circulation.

What is M0? Well it is part of a classification for money and it differs between countries.

According to the standard of currency division published by the People’s Bank of China:

  • M0: Refers to cash in the hands of residents and enterprises which offer the most liquidity.
  • M1: M0 plus demand deposits in the bank, which are also highly liquid because they can be withdrawn at any time, and represent the real purchasing power of an economy.
  • M2: This refers to the total money supply. It’s M0 + M1+ time deposits, savings deposits and anything else that has the potential that offers real purchasing power.

The existing electronic payment tools in China, such as Alipay and WeChat, are based on the existing bank system and are used to digitize M1 and M2, so DCEP does not conflict with these electronic payment tools.

Central Bank & Commercial Bank: A Two-Tier Operation System

As with the issuance of RMB, commercial banks must pay a 100% reserve to China’s Central Bank. At the time of issuance, the Central Bank issues a digital currency to commercial banks. At the same time, it deducts from a commercial bank’s deposit reserve. Afterwards the commercial bank exchanges digital currency to the public.

In this way, other commercial banks and financial institutions can cooperate with the Central Bank to maintain a two-tier operation of the digital currency circulation system. On the one hand, the resources of commercial institutions can be used to disperse the risks borne by the Central Bank, and on the other hand, the economic crowding out effect on the deposits at commercial banks can be avoided.

Centralized Management System

As a sovereign credit currency, DCEP is centralized which isn’t something looked highly upon in the cryptocurrency world, however it does have a few benefits as a national currency in China.

  • As DCEP is the Central Bank’s liability to the public, endorsement by the Central Bank would provide a stronger credit guarantee.
  • DCEP is a currency, and the Central Bank can use the currency for regulation.
  • It can prevent currency over issuance.

A digital currency system needs to support widespread public use, however, current blockchain architecture cannot offer a performance that is strong enough to work on a level needed for widespread public use.

DCEP does not have a preset technical route nor does it rely on a fixed type of technology. In addition, it can support smart contracts. However, it is worth noting that it only supports smart contracts that are beneficial to monetary function; it will be more cautious towards smart contracts that exceed a monetary function.

Differences from WeChat and Alipay

Although WeChat, and Alipay use mobile phones to transfer money, they are fundamentally different from DCEP.

First of all, DCEP’s dual offline mode cannot be achieved by existing electronic payment tools.

Although Alipay and WeChat can be used in underground malls or places with a poor signal, it is not always reliable. Many customers throw their hands in frustration and turn to cash or card when problems occur. DCEP is designed to be installed on your phone and transfer can be made even without an internet connection.

Secondly, Alipay and WeChat are based on commercial bank accounts and use commercial bank deposits for settlement, while DCEP is settled by the currency of the Central Bank instead of the M0 part. The safety and stability of the tens of thousands of commercial banks that are responsible for their own profits and losses cannot necessarily be higher than that of the Central Bank, which has a national credit guarantee behind it.

Finally, the most important thing is that the issuance of DCEP can promote the internationalization of the RMB. As long as the mobile phones of both parties have the app supporting the DCEP wallet standard, transactions can be realized based on the real-time exchange rate, bypassing the bank accounts of both parties. Alipay, WeChat, and foreign methods such as PayPal all rely on the users’ respective bank accounts.

DCEP Timeline

DCEP came to public attention only in the second half of last year, however, as early as 2014, the Central Bank began to set up a team to study the framework of digital currency issuance, business operation, the key technologies of a digital currency, the circulation environment, and potential legal issues.

January 2016

The first digital currency seminar of the People’s Bank of China was held in Beijing. The meeting clarified the strategic significance and objectives of the Central Bank in exploring the issuance of digital currency. This was the first time that a Central Bank from anywhere around the world publicly spoke about a legal digital currency.

July 2016

The Central Bank launches a R&D prototype of a digital currency bill trading platform based on blockchain technology. The digital currency institute is mainly responsible for the research and development of the underlying blockchain platform and a ticketing exchange node of a digital currency system.

June 2017

The People’s Bank of China announced the promotion of blockchain development in their five-year plan.

March 2018

The People’s Bank of China announced the successful establishment of the Blockchain Registration Open Platform (BROP).

July 2019

Wang Xin, director of the Central Bank Research Bureau, stated that the State Council had approved the Central Bank to organize the research and development of a Central Bank digital currencies.

August 2019

In the third Fortune Forum of China Finance, Mu Changchun, deputy director of the Payment and Settlement Department of the Central Bank, announced that the Central Bank’s digital currency will use a “two-tier operating system.”

The State Council issued a report, the perversely long Opinions on Supporting Shenzhen to Build a Pioneering Demonstration Zone with Chinese Characteristics which mentioned supporting innovative applications such as digital currencies for use in Shenzhen.

September 2019

The Central Bank’s digital currency began a “closed loop test” to simulate payment scenarios involving “some commercial and non-governmental organizations”.

December 2019

Mu Changchun, freshly promoted as the director of the Digital Currency Research Institute of the People’s Bank of China, said that DCEP has basically completed top-level design, standard formulation, function research and development, and joint testing.

DCEP Launching Quicker Than Expected

COVID-19 has greatly reduced the contact frequency between people, as well as reduced the amount of paper money needed as more people are relying on mobile payments. As institutions, as well as individuals become increasingly reliant on mobile payment methods, there is greater opportunity for a national digital currency to accelerate development and be immediately accepted for widespread use.

Reduces Currency Issuance and Circulation Costs

The issuance, printing, returning, and storage of banknotes all require costs. If this cost can be saved, the efficiency of society can be improved. In addition, the issue of currency also needs to consider the costs of anti-counterfeiting. Digital currencies are based on the consensus mechanism of a blockchain. Counterfeit currency and double-spending will not be recognized by other nodes. Compared with the anti-counterfeiting techniques of paper currency, the anti-counterfeiting costs of a digital currency are greatly reduced.

Low-Cost Cross-Border Payments

Cross-border payments in RMB must go through an account, and foreign banks must offer RMB. The payee must wait several days to receive the payment, and must also pay a small commission. Contrast that with DCEP, where under ideal conditions, only a digital wallet is needed to transfer money, and the recipient can immediately receive the relevant payment. Compared with this, time and money costs are reduced, which can promote the internationalization of the people.

Controlled Anonymity

Because DCEP does not need a bank account to transfer value, it can achieve controlled anonymity. But unlike Bitcoin’s complete anonymity, the Central Bank has legal access to transaction data, whereas no one else does.

DCEP transactions are as anonymous as cash transactions, but if an abnormal transaction occurs, the Central Bank has the ability to detect who is behind it. This can reduce the risk of money laundering and malicious financing.

Summary

On February 4th, the Central Bank announced another digital currency patent titled “a method and system for generating digital currency”. So far, the Central Bank has applied for all the patents related to the whole process of issuing a digital currency, including generation, circulation, and recycling.

In an interview with China Daily, Yang Dong, Director of the Financial Technology and Blockchain Research Center of the future Law Research Institute of Renmin University of China, stated that the launch of a digital currency may be further accelerated due to the impact of the epidemic.

Combined with DCEP’s off-line operational, low-cost, and effective drive to internationalize the RMB, a launch looks all set.

What is certain is that if DCEP really uses blockchain technology, when it is put into practice, it will help to build the underlying infrastructure of the blockchain. More importantly, blockchain technology will be recognized by the mainstream business community.