China has promised the world an all-digital currency. The digital yuan will replace physical cash with a digital twin: A monetary means of exchange guaranteed by the central bank and issued to consumers made up of code.   

Announced in 2014, China’s central bank digital currency, dubbed Digital Cash/Electronic Payments (DCEP), was slow to take off. Officials quickly accelerated their efforts in the summer of 2019 when Facebook announced it was working on its own digital currency, Libra.

Media and fintech enthusiasts have been speculating about its grandiose effects: It will topple the dollar and upend the international order, the story goes. The US must catch up or say goodbye to its reign as a financial leader.

Bottom line: We don’t know much about the DCEP, and we probably won’t until it’s ready for prime time. What we do know indicates that, despite the hype, national implementation is a long way off. Current pilots are limited to very few select individuals. The PBOC has said it will still be testing the DCEP in 2022. But rising political tensions with the US are likely to further accelerate the PBOC’s schedule. We could see a wide rollout of the DCEP within the next year.

The problems

What’s wrong with cash? The People’s Bank of China (PBOC), hopes to solve many of the government’s biggest currency headaches:

  • Physical cash is an expensive business. It needs to be printed, maintained, and circulated. Digital currency would reduce these costs.
  • Cash is also very hard to track and trace, which makes it an attractive means of exchange to whoever is involved in criminal activity.
  • Enhanced supervision of transactions could help authorities fight money laundering and illegal financing in the country.
  • The digital yuan will work with “controllable anonymity.” Transactions will be private to the transacting parties unless the PBOC has reason to investigate them. Large transactions will be subject to enhanced scrutiny, and big data models will alert financial authorities of suspicious activity.  

What’s wrong with e-payments? China is often called a cashless society, but this is not true for everyone.

  • In 2017, the World Bank estimated that 225 million Chinese adults do not have access to traditional banking services. Without a bank account, it is almost impossible to use Alipay and Wechat Pay.
  • Based on demographic data and latest Alipay and Wechat Pay user figures, TechNode estimates that about 272 million people over the age of 15 do not use either one of the dominant digital payments services.  
  • The DCEP will work without a bank account, which will likely boost financial inclusion. Anyone with a smartphone will be able to use the digital wallet for transactions or storing money.
  • This will challenge Ant Group and Tencent’s dominance in the payments market, but that is partly the point.
  • The PBOC is reportedly not happy about the tech giants control over the country’s finances and is looking to launch an antitrust investigation into their activities.
  • The advent of the DCEP will help banks and fintech companies build new digital payments platforms, increasing competition whilst enhancing the PBOC’s oversight.

The solution

The engineering: A high-level understanding of how the system will work has been made public through press releases and interviews.

  • The DCEP will substitute cash, known as the M0 money supply. This includes all notes and coins in circulation among consumers, but not bank deposits and checks.
  • Much like physical cash, it will be issued by the central bank and distributed through commercial banks.
  • The digital money itself will not be blockchain-based. Rather, the systems commercial banks use to distribute and manage it may feature the decentralized technology.
  • Three agencies under the PBOC will be tasked with overseeing the digital M0. The Identification Center will onboard users and give them unique security credentials. The Record Center will keep track of transactions. Finally, the Big Data Analytics Center will provide protection from cybersecurity threats.

The security hurdle: The International Monetary Fund, the Bank of International Settlements, a global consortium of central banks, and numerous consultancies, banks, and observers have stressed the importance of ensuring tight security before issuing any CBDC.

  • Between Alipay and DCEP lies a huge cybersecurity chasm. The money in an Alipay wallet are merely numbers on a screen, collateralized by cash reserves.
  • In contrast, in a DCEP wallet, the numbers on the screen are the cash, the digital and the physical are one and the same. Hacking Alipay is like breaking into a bank’s IT system. Hacking DCEP is like breaking into the bank’s vault.
  • The PBOC has to come up with airtight security before a nationwide launch, and that takes time.

The progress

Extending pilots: In April, the PBOC announced it had begun trialing the DCEP. The news brought about a media frenzy, but they are very limited, indicating that the digital yuan is far from national  deployment.

  • The DCEP system is available for select, whitelisted individuals in four cities; Shenzhen, Suzhou, Xiongan, and Chengdu.
  • In a press release announcing the pilots in April, the PBOC stressed that they were currently “just a test.”
  • Selected civil servants taking part in the pilot areas receive their existing transport subsidies through the digital yuan app, and can use the app to pay for public transportation.
  • In early July, Didi and Meituan announced they are partnering with the PBOC to explore commercial applications of the digital currency.
  • While including the tech giants in the pilot is undoubtedly a milestone, what will come of this “strategic cooperation” is yet undetermined.  
  • This week, Chinese media reported that pilots have been extended to include bank employees in the selected areas.
  • In line with this week’s news, we expect to see pilots gradually and quietly expanding over more people and locations over the next year and until 2022.

Behind closed doors: Search Chinese social media long enough, and you will find rumors covering pretty much anything—except the DCEP. Chinese netizens are either censored or clueless about DCEP developments, other than those reported by the media.

  • A photo showing the DCEP digital wallet emerged on social media in April soon after the trials were announced. The wallet appears to be simplistic compared to WeChat Pay or Alipay, with a digital rendition of a one yuan bill.
  • Two other photos have appeared since, showing the DCEP on commercial bank apps.
  • PBOC officials haven’t confirmed the authenticity of these photos.
  • The individuals chosen to test DCEP are unknown, as is what they are using DCEP for, such as commercial payments, bank transactions, or mahjong betting.  
  • Banks in Suzhou contacted by TechNode did not disclose any information about DCEP.

The 2022 promise: Despite the void of information about the DCEP trials underway, the PBOC has made a single specific promise: The DCEP will be tested during the 2022 Winter Olympics. This is a stark contrast to the fact that there is no official timeline that describes how and when the digital yuan will be rolled out.

  • A spectacular event when the whole world is watching China would be an excellent opportunity for the country to show off its latest technological achievement.
  • The PBOC hasn’t said whether the Winter Olympics will be a hard launch for the DCEP. It is also unclear whether the event will be the last digital yuan pilot.

The revolution

The dollar’s demise: If you follow this story on the news or Twitter, you might be concerned that the US dollar is on its deathbed. Given that a full rollout of the digital yuan is a long way to go, China hawks can take a breather.

  • Even when the DCEP is fully implemented in China, it will take concerted, strenuous efforts in trade and monetary policy to release the global financial system from the US’ chokehold.
  • This will eventually happen, but not in the short to medium term.

Programmable money: What is more likely in the medium term are vast improvements in China’s monetary and financial systems. Beijing hopes the ability to program digital money will help it fight crime, money laundering, and upgrade the implementation of monetary policy on an unprecedented level.

  • Central banks use mostly blunt-force instruments, such as interest rates, to stabilize the economy in times of crisis. They also face considerable time lags when it comes to collecting information.
  • Several of the patents filed by the PBOC lay out a vision for algorithmic management of monetary policy.
  • Some of the patents seek to algorithmically adjust the money supply based on certain triggers, like interest rates, the Financial Times reported.
  • But it doesn’t stop there. One of the reasons why the Chinese leadership was hesitant to issue cash relief directly to households after the Covid-19 lockdowns was that they were unlikely to spend it.
  • Using the DCEP, authorities could add an expiration date to direct cash payments to households. This would encourage people to spend it, pumping the money into the economy instead of savings accounts.
  • China has one of the highest saving rates in the world. Since 2003, people in China have been saving more than 35% of their income, according to OECD data. In the same period, US residents saved around 7%.

Crisis breeds urgency: Programmable money will greatly enhance the government’s speed and efficiency in times of economic crisis. The quicker the DCEP is implemented, the better prepared China is to deal with any sort of crisis.

  • The PBOC reportedly ramped up the pilots after Covid-19 hit China, wreaking havoc in the country’s economy.
  • The trials started in April, just a month after lockdowns were largely lifted in China.

In the last few weeks, we have seen significant escalations in the China-US techwar. As the likelihood of a decoupling between the two economies increases, so does the PBOC’s sense of urgency to release the digital currency widely.

Pilots are likely to be accelerated further, and the DCEP could be fully released within the next year.

Eliza Gkritsi

Eliza was TechNode's blockchain and fintech reporter until July 2021, when she moved to CoinDesk to cover crypto in Asia. Get in touch with her via email or Twitter.