Since Bitcoin's white paper release in 2008, people’s minds were lighted up by a prospect of a digital currency, truly decentralized and free of the Government. For the governments, that meant the complete opposite. They didn’t think it would be a real threat to them. They ignored it, laughed at it, mocked it, and in the end, started to fear it. Regulations came into place, and Central Banks with different Governments began to think
“what if we create a cryptocurrency that is controlled by us?”.
Nation-states have worried that an unregulated and uncontrollable currency could inhibit a central bank’s ability to keep a country’s unit of exchange stable. This lead to the birth of CBDCs. On the forefront of national digital currency, development stood and still stays, China.
In 2014, Xiaochuan Zhou, then Governor of the People’s Bank of China, established a Digital Currency Research Institute intending to explore its potential use for the PBOC, the country’s central bank. The following few years saw the birth of a few research centers scattering across the country. Recently China has pushed hard on its DCEP (Digital Currency Electronic Payment) systems with test rollouts of its CDBC.
In September last year they did an airdrop of $1.5M to 50 thousand selected citizens of Chinese tech hub Shenzhen. That’s roughly 10M Digital Yuans.
In December last year they distributed around 20M Digital Yuans ($3M) to 10 thousand residents of Suzhou, a city known for its exquisite Classical Gardens. The lucky ones now suddenly each had RMB 200, an equivalent of $30, in their wallets.
It allows the lucky citizens to spend the small government handout of cash with some merchants. The question is, why is China so eager to push its solution to the public?
What is DCEP?
CBDCs, as the name suggests, is a digital currency controlled by a central entity, a nation state’s existing financial institutions, like a national bank. Instead of paper banknotes, a bank can issue a digital representation of the nation’s currency, like the U.S. dollar or Chinese Yuan.
It’s pretty centralized and controlled distribution of money but in digital form. Whereas Ethereum or Bitcoin (not even talking about some stablecoins) are more decentralized and unregulated. On the other hand, CBDCs will have monetary policies in place and backed by proper financial reserve to be much easier to use.
In China, the trials of DCEP have been done in two ways. The first has involved the People’s Bank of China sending the digital yuan to commercial banks. Commercial banks then distribute the currency to their customers. The second way was to use a lottery system (the above examples were from this type of lottery) where people could use an application like JD.com, one of China’s most prominent e-commerce players, which allows customers to purchase items with the digital yuan.
China hasn’t published any legislation yet on how its DCEP will operate, but it’s worth noting, digital yuan will be programmable money. Meaning some restriction or logic could be added, imposed on the currency. For example, they can decide how long money can be stored on a person, where it can be used, and provide an additional level of security to the system. Government can even “stimulate” consumer spending by imposing an expiry date on its digital yuan, where after 30 days, it will disappear.
It goes without saying, but DCEP is trackable, allowing China’s state surveillance infrastructure to monitor citizens more closely. As decrypt.co reports:
Fan Yifei, deputy governor of the PBOC, said in an article published in state-backed publication Yicai Global, that cash and coins were not easy to use, were easy to counterfeit and because of their anonymity, could be used for illicit purposes.
Such monitoring and tracking could help catch any illegal activities and even collect fines as soon as it was detected. Think about getting a speeding ticket and automatically be charged for it, without even a way to explain yourself.
China 🇨🇳 push of it Digital Yuan 🧧
The premise for a CBDC is to create a digital equivalent of a physical currency that is secure, unique - each token issued by the Government will have a unique identifier, much like existing banknotes - and without the same friction that comes with printing, storing, and moving physical money around a country. And that’s one of the reasons why China is interested in this. They would have control of all the money flow that is happening in the country and also globally. As we know, China likes to have control over many aspects of its information flow and what people should know and what they shouldn’t. That’s why they have the Great Firewall.
We’re in the age of digitalization where applications like PayPal, Revolut, or WeChat are prominent and way to go when it comes to payments. Billions of dollars are going through these apps, and governments don’t know how that money is being spent exactly. Especially in China, WeChat is the leading payment platform, and everything is done through that app. One corporation having so much power in China isn’t exactly what the Chinese Government wants in the long run; thus, having a “competition” in the form of Government distributed digital yuan would solve a big problem for them.
As stated before, China could monitor every transaction and integrate it with its social credit system. example with speeding ticket and collecting fines as they are detected and automatically lowering your social score is a scary perspective. Still, soon it will be a reality in China. 👮
China wants to become independent of the U.S. dollar, which is currently a backbone of world financial systems. China is working on two front to change that. They’re cooperating with Russia to ditch Dollar and move towards the economic alliance. As Dmitry Dolgin, ING Bank’s chief economist for Russia, says
“Any wire transaction that takes place in the world involving U.S. dollars is at some point cleared through a U.S. bank. That means that the U.S. government can tell that bank to freeze certain transactions.”
With tariff wars and sanctions imposed on China and Russia, it’s only logical for them to form an economic alliance. As nikkei Asia reports
“Russia has been rapidly accumulating yuan reserves at the expense of the Dollar. In early 2019, Russia’s central bank revealed that it had slashed its dollar holdings by $101 billion — over half of its existing dollar assets. One of the biggest beneficiaries of this move was the yuan, which saw its share of Russia’s foreign exchange reserves jump from 5% to 15% after the central bank invested $44 billion into the Chinese currency. As a result of the shift, Russia acquired a quarter of the world’s yuan reserves.”
To read more about this, go to the Nikkei Asia article.
Another astonishing development from China on the monetary from is Pan-Asian alliance to create a cross-border digital currency which will consist of Chinese yuan, Japanese yen, South Korean won, and the Hong Kong dollar. It is proposed to foster free trade agreement between the participating countries while reducing the dominance of the United States Dollar and the potential Facebook Diem.
As we can imagine, China is pushing for its DCEP to be the primary coin of such trades between these countries, strengthening its currency.
China is doing everything it can to push its agenda on monetary policies inside their country and even outside. Digital Yuan or DCEP is a massive project that will only grow in size and reach. Having competition in any form of “traditional” cryptocurrency will only slow down their impact, and that’s why we recently saw a ban on bitcoin mining. China is making more room for its solution to control and impose any restrictions as they want.
Cyberpunk’s future is here. Either we like it or not. Having a genuinely decentralized competitor wasn’t more important than ever.
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