Digital currency is changing the way economies and banks function. Currently, 80 percent of central banks around the world are working on creating a digital currency and 90 percent of them are in emerging markets. China is one of these emerging markets and has been working on a sovereign digital currency since 2014. Their currency, Digital Currency Electronic Payment (DCEP), has been gaining momentum over time and is already being used to pay for transportation, education, and other goods and services across China.
How DCEP works
Once launched, an electronic wallet app will allow consumers to link their bank cards to spend or deposit DCEP, or digital yuan. Unlike competing payment platforms WeChat Pay and Alipay, which collectively dominate more than 90 percent of the e-commerce market, DCEP would not require an internet connection. Payments could be made simply by tapping two phones together.
DCEP is revolutionary because it would be the first central bank digital currency. It would also be a huge step forward for the adoption of blockchain technology. The digital currency would not only help strengthen the yuan against the dollar but would also make the yuan an international currency and help facilitate trade across borders. The traceability of DCEP will help reduce illegal activity and help China create a more effective monetary policy.
While DCEP may resemble a cryptocurrency, it is different in many ways. Mu Changchun, deputy director of the People’s Bank of China, made it clear that DCEP is nothing like cryptocurrencies such as Bitcoin or even stablecoins. Mu Changchun said that the currency “is not for speculation” and “does not require the support of a basket of currencies.” Libra, Facebook’s cryptocurrency, relies on a basket of global currencies. Fifty percent of the basket will consist of the U.S. dollar and the basket will not include the Chinese yuan. American businesses also make up the vast majority of the 28 founding members of Libra, none of which are Chinese. Facebook is currently banned and inaccessible in China.
Why is China creating a digital currency?
The idea of DCEP started as an attempt to improve the yuan and integrate it with blockchain technology. However, the decentralized nature of blockchain was not as compatible for a centralized national currency. Still, there remain a lot of advantages for China to create a digital currency even though mobile payment technology and e-commerce is already widely adopted. DCEP would allow for easier and cheaper transfers of money, and, as mentioned above, protect against counterfeiting and money laundering and allow China to create a much more effective monetary policy.
With the emergence of Libra, Bitcoin, and other alternative currencies, DCEP is a way for China to retain control over their currency while turning towards e-currency and also make the yuan international. If alternative currencies become standard, the dollar would become much more dominant while the yuan would be hurt. This is evident as Libra’s basket of currency mainly consists of the dollar and the majority of businesses backing it are American. Additionally, China would lose a lot of control over their monetary system and illegal activities, such as money laundering, would become easier.
In early December, JD.com, China’s largest online retailer, became the first online retailer to accept the digital yuan. This further suggests that the digital currency may soon become standard in China. To help raise awareness, JD is also doing a lottery giveaway of around 20 million yuan (equivalent to $3 million), enabling 100,000 winners of this digital currency to spend it on their platform. This is not the first time China has given away this new digital currency: In October, 10 million yuan ($1.5 million) were given away via a lottery in Shenzhen to promote the currency and test its effectiveness.
Will Fedcoin become the future digital currency in the U.S.?
Fedcoin is a still-theoretical but widely discussed blockchain-based cryptocurrency backed by the U.S. central bank. Fedcoin would have a 1:1 exchange rate with the U.S. dollar. In a 2017 report, students at Yale argued that since much of our currency is digitized already, a blockchain-backed Fedcoin would make sense in our current economy and could help facilitate digital transactions.
The viability of current alternative e-currencies and cryptocurrencies is limited by their volatility and lack of backing by a central bank. Tether is an example of a stablecoin that claims to be backed by the U.S. dollar. However, in the absence of government regulation, what that means is not very transparent and is very controversial. Originally, Tether claimed that each coin it issued was backed by one U.S. dollar, but it was later discovered that only 74 percent of Tether coins issued were backed. It is also a stablecoin, so some volatility still exists in its exchange rate with the dollar. Fedcoin would solve this problem, as it would be issued by the U.S government and would be pegged to the dollar at all times. Fedcoin would also allow for faster transactions and cheaper transaction fees. The United States should follow in the steps of China’s creation of the digital yuan DCEP with Fedcoin, a similar digital e-currency for the dollar.
Opinions in this article are the author’s and do not necessarily reflect those of Cornell, Johnson, or the Emerging Markets Institute.