Digital Yuan launched: towards the end of cash in China?

Antony Mlelwa / 2 Jun, 2023

In order to maintain the leader position in the tech competitions, China has launched its own digital currency, designated by DCEP (Digital Currency Electronic Payment). The Chinese government started its pilot projects such as paying certain state allowances in digital currency (DCEP) since April 2020. 

Four cities with high population concentration in China are concerned by this digital currency experiment (Shenzhen, Chengdu, Xiong’an and Suzhou). In addition, 19 food and retail companies decided to participate in this pilot project, including McDonald's, Starbucks and Subway.

The first digital currency issued by a central bank

For the past 6 years, the Chinese government has been working on the creation of a virtual currency that will be issued by the Central Bank aiming to replace the paper form of Yuan(the local currency in China).

It is the world's first digital currency issued by a Central Bank and will also be the most used worldwide: today Alipay and WeChat Pay, the leaders of China's e-wallets have, between them, 1.7 billion users and WeChat Pay alone have made 1 billion transactions daily in 2020. This infrastructure will be used to distribute the DCEP and this will no doubt make its adoption and use easier.

The digital Yuan is based on a two-tiered monetary system:

- DCEP is issued by the Chinese Central Bank to commercial banks.

- DCEP is then distributed by the commercial banks to the public.

During the test phase, the country's state-owned banks, namely "Bank of China," "Industrial and Commercial Bank of China”, "China Construction Bank," and the “Agricultural Bank of China” have issued the DCEP to employees. They will be required to download a specific mobile app created by these banks in order to receive their allowance.

The reasons behind the acceleration of e-Yuan development

First of all, the e-Yuan offers a solution to the high costs of issuing, distribution, storage and circulation of the classic Yuan, as well as the inconveniences associated with the transportation and use of cash. In addition, traceability and anti-fraud are major concerns for the Chinese government. Therefore, the digital currency seems to be the right answer to these needs. With DCEP, collecting transactional data and information on the circulation of this currency is much easier to achieve. This provides an excellent reference for the development and implementation of future monetary policies. DCEP also facilitates the battle against money laundering, tax evasion, corruption and financing of terrorism activities. Based on information published by Chinese Central Bank, although the digital currency adopts a controllable system of anonymity, the government can still use big data and other technologies to identify suspicious transactions and carry out necessary measures in order to control illegal transfers that hinder the country's economic growth.

In addition, DCEP can foster the development of China's digital economy. For example, the digital currency can generate big data that can promote the development of Chinese credit industry as well as the development of technology and Artificial Intelligence. This can be a step forward helping China fulfill its ambition to become a worldwide power in these areas.

China remains a country with a large wealth gap and a significant portion of the population has no access to any sort of banking services. DCEP can facilitate the disadvantaged population’s access to financial services. DCEP does not require a bank account to receive or spend it, therefore, anyone, even the poorest, can benefit from the digital currency. 

Finally, the launch of this virtual currency is also a way to promote the circulation and internationalization of the RMB in the hope of increasing its power at the global scale and to be able to compete with USD. The Digital Yuan is the best opportunity for China to challenge US dollar’s domination role as global currency.

Coronavirus amplifying the transition to virtual currency

In the context of the Covid-19 health crisis, that we are witnessing today, China has communicated about the risk related to banknotes use as a possible vector of contamination. This message shows the world that China is ready to accelerate the deployment of its e-Yuan. China had already witnessed the impact of Covid-19 epidemic on changing payment behaviors and the use of cash. The country has seen a strong growth in the use of electronic payment, which in turn could accelerate the acceptance of the digital currency at a national scale, supported by the Chinese government.

A competitor for Alipay and WeChat Pay?

Alipay and WeChat Pay are considered the best mobile payment apps in the world with more than one billion users each. This number shows the degree of familiarity of Chinese citizens with electronic payment. Alipay was launched in 2005, it is mainly an e-wallet, based on QR Code that has revolutionized the world of payment methods, thanks to its security and simplicity. When a payment is made via Alipay, the user is immediately notified with the details of transaction. This experience engages a large number of e-consumers. It is a favorable environment to test the digital currency model. The transition from Yuan into e-Yuan will therefore be done in a natural way in China.

Although Alipay and WeChat Pay are the most popular mobile payment apps in China, merchant can decide if they will accept them or not. However, DCEP is more than just a simple e-wallet. In addition to the fact that it is issued by the Central Bank to replace cash, the merchant does not have the right to refuse payment with DCEP, unlike Alipay and WeChat Pay. 

Being issued by the Chinese government, and having the same legal status as the Yuan, all merchants, without exception, are supposed to accept it for customers' transactions settlement.

Does the launch of the digital currency in China mean the end of cash? Will the Digital Yuan replace USD as the benchmark and global currency?