Almost a year ago, Facebook appeared before the US Senate Banking committee to explain the social media giant’s upcoming digital currency project called Libra. Facebook CEO Mark Zuckerberg has regularly pointed out that China’s digital payments infrastructure was more advanced than the United States. This is all the more apparent now that the PBOC is about to release the digital equivalent of the yuan called DCEP.
What is DECP?
DCEP (Digital Currency Electronic Payment) will operate on a two-tier system, whereby commercial banks convert their deposits in central banks into digital currency before distributing this digital currency to consumers. DCEP therefore should be conceived as an alternative to cash that is more conducive to the circulation and internationalization of RMB.
The DCEP will be distributed to seven financial institutions, including Tencent (the company behind WeChat) and Ant Financial (Alibaba’s digital payment arm).
The Chinese government will maintain close supervision over transactions involving DCEP which very much takes the opposite view of most cryptocurrencies. Users of cryptocurrencies are often concerned about financial privacy, easy movement of funds without trusted intermediaries, protection of wealth against inflation, and alternatives to centralized government-led financial systems.
For now, it is unclear whether DCEP will be convertible into other digital currencies. If the government allows it, DECP will compete directly with regulated stable currencies such as Libra. One may argue that DCEP’s primary goal is to counter the potential risks presented by the introduction of Libra. However, this goal is secondary to the opportunity to elevate the RMB to international currency status. Currently, the international payment system is dominated by SWIFT (Society for Worldwide Interbank Financial Telecommunication), which is not the most favourable to the Chinese yuan. China needs a new cross-border payment system to bypass SWIFT, so the concept of DCEP came into being.
China has a very large population base, and if Chinese users accept DCEP, it will lay a solid foundation for future financial services. If other countries also accept DCEP for international exchange, then its international status may well become unrivalled.
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The emergence of initiatives such as Libra and the digital Chinese yuan casts a shadow on the role to be played by decentralized cryptocurrencies such as Bitcoin in the future economy.
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