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China’s Central Bank Rolling Out DCEP National Currency, While Saying ‘Libra Won’t Succeed'

China has been reportedly developing its central bank-issued digital currency for a while and is believed to be ready to launch by China’s central bank, People’s Bank of China (PBoC).

Huang Qifan, the Vice Chairman of the China International Economic Exchange Center (CIEE), stated that the PBoC has continued to be committed to becoming the first country in the world to come out with a national digital currency.

Huang confidently emphasized that the digital currency electronic payments system (DCEP) will be ready to be introduced to the financial system soon:

“The significance of Digital Currency Electronic Payment lies in that it’s not the digitization of existing currency, but the replacement of Reserve Money (M0). It greatly reduces the dependence of the trading process on accounts, which is conducive to the circulation and internationalization of the Renminbi.”

Upon review of the 50 patent applications submitted by the PBoC, the DCEP will be powered by a two-tier operating system and would not be running on blockchain.

However, the PBoC also announced that Chinese commercial banks should be embracing blockchain and digital finance earlier this week, adding on President Xi Jinping’s speech on Oct. 24 urging the nation’s acceleration of development of blockchain technology.

Huang also expressed that Facebook’s Libra stablecoin and Bitcoin should not be trusted as they are not government-issued and are vulnerable to instability.

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China’s Central Bank Digital Currency Research Unit Signs Deal with Huawei

The Chinese central bank, People’s Bank of China’s (PBoC) Digital Currency Research Institute, has signed an agreement with multinational telecommunications giant Huawei.

Fan Yifei, the PBoC deputy governor signed the fintech research cooperation agreement between Huawei and PBoC’s Digital Currency Research Institute in Shenzhen at Huawei’s headquarters.

Huawei said that the “strategic cooperation” agreement is for FinTech research. Fan also praised the firm’s achievement in developing distributed databases and computing chips.

Ren Zhengfei, Huawei’s CEO recently publicly stated its support for China on the issuance of a digital currency to rival Facebook’s stablecoin Libra. He said: “China can also issue such currency by itself. Why wait for others to issue it?

The PBoC started its Digital Currency Research Institute in January 2017, focusing on blockchain and FinTech research. Mu Changchun, appointed to head the research said that the design of the national digital currency would be similar to Libra and would be accessible across major payment platforms including WeChat and Alipay.

Huawei has been active in the blockchain space, having revealed its Hyperledger blockchain offering in April of this year. This announcement also appears to be the first publicly announced deal by China’s central bank with a well-known company.

President Xi Jinping also called on his country to accelerate the adoption of blockchain technology recently.

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Dr. Alicia Garcia-Herrero's Take on China’s CBDC and Facebook’s Libra

In Part 1 of our interview with Alicia Garcia-Herrero of Natixis, we took a deep dive into the impact of central bank digital currencies (CBDC) regarding monetary policy and financial stability. In Part 2 of the interview, Garcia-Herrero explained the disruption of China’s CBDC – digital currency electronic payment (DCEP) on China’s monetary system. She also commented on the basket of currencies that Facebook’s Libra supports and Libra’s potential threat to monetary sovereignty.

How will China’s CBDC disrupt the existing monetary system in the nation? Do you think the Chinese CBDC will completely replace the renminbi (RMB) in 5 – 10 years? 

The PBoC’s issuance of a CBDC could be more or less disruptive, depending on the model that the PBoC finally chooses for its digital currency. In particular, a wholesale model will be less disruptive for existing digital payments. In addition, a centralized model (rather than a blockchain-based decentralized one) will also be less disruptive in terms of the degree of anonymity of transactions. Such centralization allows for traceability of CBDC transactions. 

If the Chinese CBDC is launched, how will you predict the responding action by the Federal Reserve of the United States? Do you think the Federal Reserve will issue its CBDC? 

Philadelphia Federal Reserve Bank President Patrick Harker recently stated that it is “inevitable” that central banks including the US Federal Reserve will start issuing digital currency. However, he cautions that the United States should not be the nation to lead such a move. 

The issuance of a CBDC by the PBoC may push the FED to act more quickly if such E-RMB moves cross border very quickly, substituting USD banknotes in circulation. 

Facebook announced that Libra supports the following basket of currencies: USD (50%), EUR (18%), JPY (14%), GBP (11%) and SGD (7%), yet RMB is excluded. What do you think about the currency selection? Do you think the weight of different currencies is appropriate for Libra? 

China’s reluctance to promote Facebook (within China) and potentially bar Libra could be reasons behind the RMB’s exclusion from the Libra basket. The Libra Association might be foreseeing some technical/regulatory hurdles in including the RMB. In his congress testimony, David Marcus had a similar response to a question asked on the exclusion of Chinese companies within the Libra Association.   

Countries like France, Germany and the US believe Facebook’s Libra can threaten their “monetary sovereignty,” although David Marcus of Libra disagreed. What do you think? 

David Marcus claims that with Libra there is no new money creation and I fully agree. Libra is just a basket of currencies.  

Cryptocurrencies represent a new money issuance standard based on blockchain, which has the potential of fulfilling Friedrich Hayek’s vision on the “Denationalization of Money.” With the emergence of CBDC, do you think the denationalization of money is more likely a dream instead of reality? 

Even though the technology enables CBDCs to be used beyond national boundaries, there is likely to be political resistance to making any single CBDC a global currency. For instance, a national central bank may lose control over its domestic inflation, if a significant value of domestic goods were denominated in foreign CBDCs. In reality, host central banks can actually use their regulatory power to stop the use of an E-RMB by not accepting payments in such currency. However, China’s economic power might be so high in some countries that they might not have a choice other than accept E-RMB for legal tender (or at least as far as Chinese nationals are concerned, either individuals or companies). 

What are the impacts of CBDC on the IMF Special Drawing Rights basket? 

The impacts are not significant, as the technology behind CBDCs should make processing faster, which will enhance foreign trade. Countries with a CBDC may be in a position to increase their trade with other countries, just because they could process their trade transactions faster. With greater trade representation, their weightage in the Special Drawing Rights may increase. 

China’s Central Bank’s DCEP is Trying to Make WeChat Pay and Alipay Redundant

Mu Changchun, the Director-General of the Institute of Digital Currency of China’s central bank, People’s Bank of China, spoke at one of the panels at the Singapore Fintech Festival held at the Singapore Expo on Nov. 12 regarding the future of digital currencies.

Mu made a comment regarding China’s central bank digital currency (CBDC), also known as the digital currency electronic payment (DCEP), saying that they are “trying to provide redundancy to our very advanced electronic payments” including WeChat Pay and Alipay.

The reason behind the comment was due to the potential risks the central bank foresees if there would be any technical difficulties with these electronic payment entities, there would be detrimental harm to the financial ecosystem. Mu added that this move was to “prepare for anything bad to happen,” given that 96% of China’s population is using electronic payment systems.

Mu briefly introduced the two-tiered system that the CBDC will be running on and noted that commercial banks will be in the loop. He also highlighted that the CBDC is targeting cross-border payments and the M0 – which refers to the Chinese Yuan fiat in circulation.

He lastly mentioned that China will be keeping the monetary policies and implementations untouched, as well as the financial system. The CBDC is a hybrid of an account-based system and a value-based system. He concluded, “we are not aiming to be a cashless-society, but rather a cash-light society.”

China’s Central Bank Partners with Commercial Banks and Telecom Giants to Test Digital Currency in Two Major Cities

New developments of China’s central bank geared towards testing its digital currency electronic payment (DCEP) in the cities of Shenzhen and Suzhou. The People’s Bank of China, the country’s central bank is on track to become the first central bank on the globe to issue a national digital currency. Huang Qifan, the Vice Chairman of the China International Economic Exchange Center (CIEE), stated that the PBoC has continued to be committed to becoming the first country in the world to come out with a national digital currency.

According to Chinese financial news site Caijing, the central bank has partnered with seven state-owned companies to test out the currency on four commercial banks and three telecom giants. The test will aim towards the transportation, education, commerce, and medical industries.

Some of these banks chose to collaborate with telecom giants to develop SIM cards with built-in digital wallets, while other companies wanted to build independent wallet apps.

The first phase of the pilot program in Shenzhen will consist of a small-scaled testing period at the end of this year, while the DCEP will be continually promoted in the city in 2020.

According to Caijing, several commercial bank insiders said, “Previously, the central bank was in no hurry doing this. Recently, all of a sudden, they accelerated.” In light of Facebook pushing out Libra, the central bank seemed to have fast-forwarded its plans to carry out its digital currency ahead of the original schedule.

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Japan Aims to Curb the Potential Influence of China’s Digital Currency With Help From the US

Aiming to curb the potential influence of China’s digital currency electronic payment, its nation’s central bank digital currency, Japan is looking to release its own digital currency proposals today. According to Prime Minister Shinzo Abe, the country is also requesting support from the US Federal Reserve.

Norihiro Nakayama, the Vice-Minister for Foreign Affairs in Japan and the top member of the Liberal Democratic Party, the ruling party that drafted the proposals, said that he wishes the “Federal Reserve would partner with six other central banks including the Bank of Japan in studying digital currencies.”

As the US Dollar remains the world’s dominant currency, Nakayama added, “We sense the digital yuan is a challenge to the existing global reserve currency system and currency hegemony. Without the US, we cannot counter China’s efforts to challenge the existing reserve currency and international settlement system.”

Nakayama predicted that with the Belt and Road initiative, which includes a digital economic framework, the digital yuan is highly likely to become the standard of the digital economy.

The former head of financial settlements at the Bank of Japan, Hiromi Yamaoka said an interview that China is the competitor; “if the yuan is used more widely than the yen, it will lead to a decline in Japan’s economic power and influence in the mid to long term.”

This update came in just less than a day after the Federal Reserve Governor Lael Brainard said the reserve is looking to research on central bank digital currencies. He further suggested that the Federal Reserve is changing its attitude towards the possibility of a Fed digital currency.

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The Issuance of China's CBDC On The Horizon, According to Insiders

The issuance of central bank digital currencies (CBDCs) has been gaining traction as various nations have shown interest. The People’s Bank of China (PBoC), China’s central bank, has finished the development of a CBDC’s basic function and relevant laws are being drafted to set the ball rolling for its circulation.

China seeks to be at the forefront in CBDC issuance

According to industry insiders, the PBoC is undertaking the CBDC project in collaboration with private companies. The Vice Director of the Advanced Research Institute of Blockchain under the Tsinghua University arm, Cao Yan, noted that this approach is preferred because private firms offer a rich experience in third-party payment and blockchain technology.

Central banks across the globe have had to go back to the drawing board to ensure market liquidity as the coronavirus (COVID-19) epidemic has wreaked havoc worldwide. Some of them, such as the Bank of Japan and the European Central Bank, have adopted measures like zeroing interest rates to stay afloat.

China is touted to propel the establishment of its CBDC as it will be instrumental in pumping in liquidity in its economy as it is one of the hardest-hit countries by the coronavirus, having recorded more than 3,000 deaths.

Cao noted that the issuance of China’s CBDC would be timely in the face of this severe infectious disease.

Alipay, the electronic payment arm of Alibaba has also revealed its five patents related to the development of China’s CBDC from January 21 to March 17. The patents’ areas of specification include issuance, transaction reporting, dealing with illegal accounts amongst others. However, Mu Changchun, the Director-General of the Institute of Digital Currency of China’s central bank previously mentioned that China’s CBDC, also known as the digital currency electronic payment (DCEP), saying that they are “trying to provide redundancy to our very advanced electronic payments” including WeChat Pay and Alipay.

A cryptocurrency is favored as the ideal tool needed in integrating a central bank’s negative and zero interest rate policy into commercial banks. Moreover, searches for cryptocurrencies like Bitcoin have been skyrocketing amid the coronavirus pandemic as approaches, such as working from home and social distancing, are being favored.

CBDCs are considered risk-free

According to a Consensys report, CBDCs are risk-free when compared to digital assets like Facebook Libra. This is founded on the actuality that CBDCs are digital assets that are pegged to a real-world asset and backed by the central banks meaning that they represent a claim against the bank precisely the way banknotes work. As a result, central banks will have full control of their supply.

This, therefore, explains the reason why China has set eyes on the issuance of its CBDC as the world grapples with the coronavirus pandemic that has claimed more than 16,000 lives and made the global financial market nosedive.

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China's Pursuit of Digital Yuan "Unswerving" in Wake of COVID-19 Global Pandemic, says Central Bank

China’s central bank has further galvanized its public commitment to creating the first central bank digital currency (CBDC), a digital version of the Yuan, at an annual meeting hosted last Friday by the People’s Bank of China (PBoC) vice-governor Yifei Fan.

A summary notice of the 2020 National Currency Gold Silver and Security Work Video and Telephone Conference released on April 4 outlined the People’s Bank of China priorities for the year ahead which reaffirmed its commitment to the digital Yuan which is also being called a Digital Currency Electronic Payment (DCEP).

According to the summary, the PBoC’s continuous improvements to cash systems and securities will be guided by Chinese Leader Xi Jinping’s new era socialism with Chinese characteristics. Per the release, “One is to strengthen the top-level design, unswervingly advance the research and development of legal digital currency, systematically promote the reform of cash issuance and return systems, and accelerate the promotion of banknote processing business, issuance of bank guards and issuance funds.”

This marks the third time that the DCEP has been raised at the annual meeting and the intensity of the language used seems to signal a strengthened commitment by the PBoC.

The DCEP Top-Level Design

So how will China create its digital currency? First of all, we know that the digital currency will not be running on a blockchain. After a review of the 50 patent applications submitted by the PBoC, it will be powered by a two-tier operating system and will not be fully decentralized.

According to Binance, the central bank DCEP will be backed 1:1 by Renminbi fiat, following a two-tiered structured system involving the central bank, commercial banks, and the retail market. The first layer consists of the PBoC issuing and redeeming China’s digital Yuan via commercial banks. The second layer is responsible for connecting the commercial banks with the retail market. The plan is to replace notes and coins in circulation, known as the M0 supply.

China’s central bank mentioned that their digital currency would be issued to seven institutions in the coming months, but that was last September.

Paul Schulte, who worked as the global head of financial strategy for China Construction Bank up until 2012 says that the largest and second-largest banks of the world, Industrial and Commercial Bank of China and Bank of China as well as the Agricultural Bank of China, along with Alibaba, Tencent and Union Pay will be receiving the digital currency first.

COVID Incentives

Although China’s digital Yuan project has been in development for years, given the effect of the coronavirus outbreak and its spreadability through surface contact, there may be added motivation to move beyond physical bank notes. The PBoC previously announced that it would disinfect cash for up to two weeks before absorbing it into their vaults and put around 600 billion of new yuan into circulation on Feb. 15

Researchers at the Bank for International Settlements (BIS) recently released its newest quarterly report on the changes in the payment industry, including the market impact of the recent coronavirus outbreak.

The report highlighted the ways the COVID-19 could be the catalyst to spark mainstream digital payments. Per the report, “The most transformative option for improving payments is a peer-to-peer arrangement that links payers and payees directly and minimizes the number of intermediaries. Many peer-to-peer arrangements use distributed ledger technology (DLT),”

Bitcoin and Libra have also caught the institution’s attention, while the BIS acknowledged that central banks are increasingly exploring the “desirability and feasibility of establishing their own peer-to-peer systems through digital currencies.”

China’s Central Bank Digital Currency DCEP to be Operational for Local Government Employees Starting in May

Local government employees in the city of Suzhou will be receiving China’s central bank digital currency, digital currency electronic payment (DCEP) in May, according to a local news outlet. China has been charging full speed with its digital currency development plans shortly after Facebook revealed its Libra stablecoin project.

Mu Changchun, the Director-General of the Institute of Digital Currency of PBoC introduced the two-tiered system that the CBDC will be running on and noted that commercial banks will be in the loop. He also highlighted that the CBDC is targeting cross-border payments and the M0 – which refers to the Chinese Yuan fiat in circulation.

Recently, China’s central bank, the People’s Bank of China (PBoC) has released a mobile app in testing that supports the nation’s digital currency. The payments app was issued by the Agricultural Bank of China and displays several features including digital currency exchange, wallet management, transaction tracking, and connecting to other wallets. It was previously reported that the new app would be made available first in four cities, including Shenzhen, Xiong An, Chengdu, and Suzhou.

The Suzhou municipal government employees will be receiving 50 percent of their transportation subsidies for May in DCEP. The DCEP will be issued to the employees by the nation’s four state-owned banks, including the Agricultural Bank of China, Industrial and Commercial Bank of China, Bank of China, and China Construction Bank. The employees were asked to download digital wallets developed by the banks to be able to receive their subsidies.

According to the local news outlet, the official document indicated that the government institutions and committees were asked to sign DCEP issuance contracts with the state-owned banks in preparation for the currency to launch in May. A PBoC-based FinTech company was previously looking for blockchain and encryption experts in Suzhou, which has now been confirmed to be responsible for the research and development and the testing of DCEP.

The PBoC previously partnered with seven state-owned institutions to roll out the pilot test of the DCEP. The pilot program aimed to concentrate first on industries including transportation, education, commerce, and healthcare. The pilot program in Shenzhen was aimed to be carried out in two phases, including a small-scale testing period, before the DCEP would be widely promoted in the city this year.

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China's Central Bank Says Digital Yuan Will Not Raise Inflation

China’s central bank has been secretive and silent when it comes to the testing of its national digital currency, which has piqued the curiousity of its citizens. A bank representative recently appeared at a state-owned television company responding to such public curiosities and gave an explanation of how the digital yuan would function.

Race to Ramp Up China’s Digital Yuan Progress

The representative confirmed that the digital yuan, commonly recognized as Digital Currency Electronic Payment (DCEP), has had a pilot test conducted. The testing has been carried out in several cities such as Beijing, Chengdu, Xiongan, Shenzhen, and Suzhou, and future testing is intended to take place in the winter Olympics.

The researcher put great emphasis that such current tests do not mean that the DCEP has been officially issued for public use.

The representative further said that this closed test of the national digital currency would not negatively affect the commercial operation of the listed institutions. The spokesperson stated that it would have no adverse effect on the traditional fiat currency (renminbi) system of circulation and issuance. The representative further mentioned that no effect would be caused on the financial market or social economy of China outside of this testing environment.

As a countermeasure against overselling the digital yuan, the bank mentioned that commercial institutions would be required to pay a 100% reserve to the central bank, first. In other words, the national digital currency would act as a kind of stablecoin, with the central bank first exchanging the virtual currencies to relevant operating agencies and various commercial banks. Such agencies will then release the digital currencies for public circulation. It is an organized system that works well to prevent any inflation because the digital yuan being staked to the traditional fiat yuan at a 1:1 ratio.

Concerning technical designs, the central bank has officially completed the top-layer of the design. The digital yuan will soon adopt a two-layer architecture as well as a two-tier delivery system besides that. The central bank also gave an important explanation with regards to connectivity. It revealed that if payment functions for payment platforms and online banking were to go offline because of weak signals, the Digital Currency Electronic Payment incorporates dual offline technology to compensate. Therefore, the digital yuan will be just as efficient as paper yuan. The bank also said that so long as two mobile phones touched with the Digital Currency Electronic Payment wallet incorporated into both, a transfer of payment can be conducted.

The bank says that the national digital currency is not tied to any kind of bank account and is free from the control of the traditional banking system. Unlike other cryptocurrencies, the national digital currency is launched by China’s central bank and backed by the country’s credit. This is similar to the electronic version of the traditional fiat renminbi. However, it remains to see how accurate the technicality of the DCEP would be.

China’s Digital Yuan to Be Operational for Local Government Employees Starting in May

China could be set to introduce its national digital currency in the market by May 2020. The Chinese administration plans to release the central bank digital currencies for its local government employees. It will be a real test to examine the usage of digital currencies among its government workers. However, it will be a pilot test of using the Digital Currency Electronic Payment for government workers’ transportation allowance. The country will also be testing the use of its digital currency electronic payment for paying salaries to its government employees.

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