Digital yuan gaining wider currency

Trial of DC/EP in Shenzhen shows tech innovation could strengthen monetary system

When China's years-long efforts for a cashless society bore fruit in Shenzhen, Guangdong province, on Oct 12, some 50,000 lucky residents of the southern boomtown, winners of a lottery, received the first batch of DC/EP, or digital currency/electronic payment.

DC/EP was issued in the form of hongbao, or electronic red packets, worth 200 yuan ($29.9) each. Some of the winners recalled that 2,000 years ago, the reigning emperor of the Qin Dynasty (221-206BC) unified China for the first time by exhorting Chinese people to use a single currency. Back then, the only legal tender of the empire was made in gold or copper.

Although backed by the People's Bank of China, the central bank, DC/EP still has to pass numerous complex tests before it can be introduced across the world's most populous nation.

Because DC/EP is not from the private sector, but permitted by the nation's law to be circulated within the national jurisdiction, it has attracted attention from all over the world. It marks a new chapter in the development of China's financial technology, or fintech sector, which is already a pioneer in electronic payments, direct loan transfers, microcredit, peer-to-peer lending and innovative crowdfunding.

DC/EP is also in line with the proposals made for the formulation of the nation's 14th Five-Year Plan (2021-25) that stress science, technology and innovation, analysts said.

A meeting of China's top leadership in late October highlighted that innovation will be at the core of development of modern Chinese society. China will make major progress in developing core technologies in key areas and become a global leader in innovation. The nation's economic and technological strengths are projected to rise significantly by 2035.

Some select cities besides Shenzhen have joined the digital yuan trials, in the run-up to the 2022 Winter Olympic Games in China. Yi Zhaoxia, a manager of Shenzhen Publication & Distribution Group's store in Luohu district, where the DC/EP trial was launched, said he has updated the operating system on the point-of-sale terminals to deal in the digital renminbi.

Some of the lucky winners of DC/EP in Shenzhen spent the embedded money at Yi's bookstore by scanning a QR code on their smartphones. It's a drill they, as users of mobile payment tools Alipay and WeChat Pay, are familiar with.

The money in their digital red packets was paid by the district government's finance department. The idea was to encourage consumption and offset the economic impact of the COVID-19 epidemic. Restaurants and supermarkets are among the 3,000 commercial establishments that are participating in the DC/EP trial. They offer related discounts to encourage consumers to use the digital renminbi.

DC/EP is different from both Alipay and WeChat Pay. While the government-backed DC/EP is the underlying currency, the two mobile payment tools are private-sector digital mechanisms to pay in yuan electronically. Hence, DC/EP would not sound the death knell for mobile payment tools.

DC/EP transactions entail smart contracts whose records are maintained, thereby ensuring fool-proof security. Alipay and WeChat Pay are more like digital wallets to keep a certain currency to make mobile payments. While DC/EP is digital cash itself, mobile payment tools are part of the country's financial infrastructure, said a senior PBOC official.

So, in practical terms, DC/EP is not a competitor to Alipay and WeChat Pay. Rather, Alipay and WeChat Pay can function as digital wallets in which people can keep their DC/EP.

The public in China can exchange local currency from their bank accounts for DC/EP at certain qualified commercial banks, said Mu Changchun, head of the PBOC's digital currency research institute.

The digital yuan is legal money available digitally. Conceivably, in the future, when adequate DC/EP is issued by the PBOC, and accepted at all POS terminals and elsewhere, people can use it just like paper notes and coins. Toward this end, the PBOC has started consultations with the public to revise a related law for clarity that "the renminbi has both physical and digital types".