Dirty Money: The Race for a Digital Currency
By Gemma Boothroyd on The Capital
Dirty money: The race for a digital currency
China’s digital currency program shows no signs of slowing down amidst the COVID-19 outbreak. A digital currency offers a clean and convenient way for the central bank to adopt a near-zero interest rate policy. It also eliminates the use of physical cash, which is known to be a virus carrier. China has been deep cleaning potentially infected bills over the past weeks through a treatment of high heat and ultraviolet light. South Korea is even burning bills — even though coins are reportedly significantly more likely to carry the virus.
Over 5 years in the making
China has been working on its DC/EP (Digital Currency/Electronic Payments) project since 2014. Yi Gang, Governor of the People’s Bank of China (PBOC), emphasized that the project’s goal is to digitize the country’s existing monetary base, rather than to create a whole new currency.
Blockchain?
Although President Xi Jinping voiced support for blockchain in 2019, there is no indication that the DC/EP project will utilize the technology. Given that the central bank will assumedly seek transaction data access, it seems unlikely that a cryptocurrency decentralized network format will be chosen.
The digital currency will not replace deposits currently held in bank accounts or other payment apps. Instead, it will provide banks with an easier method to settle payments. Zhou Xiaochuan, China’s former central bank governor, emphasized they are being “very cautious” in their implementation strategy. He highlighted that the digital currency will not threaten the existing retail banking system. The digital currency will be issued through banks, in the same manner as physical currency. A digital currency wallet will be integrated into pre-existing bank accounts.
Possible contenders
It seems highly likely that China will win the digital currency race. Many central banks including Canada, the UK, Japan, Sweden, and Switzerland are already pursuing digital currency models. However, their research is predominantly response focused. They are preparing for a potential rise in public demand for a digital currency.
China is leaps and bounds ahead. The country has reportedly filed over 80 patents related to the DC/EP project. Most of these patents have arisen from the PBOC Digital Currency Research Institute (DCRI). Mu Changchun, director of the DCRI, declared last December that the digital yuan was “almost ready.”
Alibaba, Huawei, Tencent, and China Merchants Bank are reportedly involved in the digital currency development. These companies are experienced in both blockchain and third-party payment processing.
Achieving scale
A digital currency will hardly be a shift for the already predominantly cashless society. China is familiar with scanning QR codes to pay with their phones. Apps like AliPay WeChat are linked to 1.7 billion bank accounts, and automatically withdraw funds for payment. China’s digital currency will likely achieve scale rapidly and with ease.
The yuan knows no borders
Although China may not entirely launch the digital yuan this year, it seems probable that more information will be unveiled amidst the pandemic and economic slowdown. The digital yuan will be another step in internationalizing China’s currency, rendering it essentially borderless. That is, asides from the usage and transfer limitations which will inevitably be applied by the PBOC.
