After five years of waiting, every futurists’ dream is about to come true. On August 10, the People’s Bank of China (PBOC) announced at a forum that they are “nearly ready” to launch the world’s first digital fiat currency.
Bottom line: China is building out a monetary infrastructure for the 21st century that could leave the USD, and Western systems, behind. While they’re not the only country looking into it, China has all the elements needed to roll it out: an economy rapidly phasing out cash, a banking system in need of more transparency, and a geopolitical strategy to internationalize the RMB.
A brief timeline
- Jun 29 2009 – After the runaway success of QQ Coin, China issues rules stating that virtual currencies can only be used “to trade in virtual goods and services provided by its issuer, not real goods and services.”
- Dec 3 2013 – The PBOC, along with several other ministries and regulatory bodies, issues a Notice on Precautions against the Risks of Bitcoin. The Notice defines bitcoin as a medium of exchange, not a currency. It also banned financial institutions from using or accepting bitcoin in transactions.
- Jan 20 2016 – The PBOC announces the formation of a blockchain research group in 2014 to work on developing a digital currency.
- Oct 14 2017 – China’s central bank announces the completion of trial runs on digital currency supply algorithms.
- Dec 15 2017 – The central bank completes a trial run of a digital bank acceptance exchange.
- Mar 9 2018 – Zhou Xiaochun, then-governor of the PBOC, told media that the currency would be called “digital currency electronic payment” or “DC/EP.”
- Jun 22 2018 – The Digital Currency Research Lab at the People’s Bank of China files for a digital wallet patent.
- Jun 18 2019 – Facebook announces Libra.
- Aug 10 2019 – At a forum in Beijing, Mu Changchun, the deputy chief of the central bank’s payment and settlement, say their virtual currency is “nearly ready.”
What it is:
- It’s being called the “DC/EP” system.
- It’s a centralized digital-only currency meant to supplement, and perhaps one day replace, money issued directly by the central bank.
- It will include mechanisms to ensure the real-name identity of its users as well as measures to prevent money laundering, terrorism financing, and tax evasion.
- Both the central bank and commercial banks will be legitimate issuers.
What it isn’t:
- It’s not blockchain. At the August forum, Mu said that a pure blockchain architecture could not fulfill their requirements for “retail usage.”
- It’s not decentralized. Implementation details are scant, but it looks like the PBOC and other trusted banks will act as super nodes.
- It’s not for consumers, at least not at first. It will first be used by financial institutions to facilitate bank-to-bank transfers and settlements. It could take another five years before we see it used in consumer applications.
Factors behind the creation of DC/EP:
- RMB internationalization: China has been working to internationalize the RMB since at least 2007. The IMF added the RMB to its list of reserve currencies in 2015 before adding it to the Special Drawing Rights list a year later. The Belt and Road Initiative is a key component in encouraging greater international adoption of the RMB. The BRI will probably see the first international tests of China’s digital currency.
- Regulatory mechanisms for a cashless economy: The world’s economies and financial systems are quickly moving away from cash. In some countries, people are using plastic (credit cards, payment cards, etc.). In China, it’s all on the mobile phone.
- Transparent transactions: Shadow banking has been a problem in China since at least the financial crisis of 2008. An alternative to risk-averse banks, shadow banking has been worth up to 87% of China’s GDP and, at one point, exposed China’s economy to massive systemic risk. While cleaned up and less of a threat, it still does exist. A centralized, transparent (to the controllers) digital currency would allow regulators and policymakers to see how money is actually being used.
Digital RMB vs Libra: Announced earlier this year, Facebook’s Libra has also been in the works for some time and is closer to a “traditional” model of blockchain: a consortium of private entities share governance rights; its value is determined by a basket of currencies (similar to stable coins like Tether); and all transactions are encrypted.
And, while it has received its share of criticism from US lawmakers, the PBOC’s reaction shows how concerned they are. For good reason, too. Facebook currently has a userbase of more than 2 billion worldwide, 65% greater than China’s population. Around 20% of those users are in Southeast Asia, an emerging region quickly becoming a locus for competition between the US and China models.
Given how often the American public and private sectors find themselves in bed, Facebook’s Libra could be interpreted as a proxy for a US government-backed digital currency, at least until if/when the Federal Reserve releases its own. On top of that, China—including the country and its businesses —still doesn’t have a stellar record for internationalization. If Libra does take off around the world, the uphill battle to be the wallet of choice will get even harder.
China still in the lead: It’s becoming more difficult to argue with an increasingly common sentiment: China is leading the world in innovation. Even though I wouldn’t go that far, it is clear that China is leading in the implementation of innovation and the digital currency is yet another example of this. While the Western world struggles with the breakdown of the post-WW2 order, China is laying down the foundation for its leadership into the future. No matter where you land on the China debate, the implementation of a digital currency is only going to put them that much further ahead.