These new payment methods rely on digital transfers of money using an assortment of technology intermediaries including mobile devices, QR codes, and token systems. But the PBOC has begun laying the ground work for digital currency to be used in cross-border transactions. Last month, the PBOC joined central banks from Thailand, United Arab Emirates and Hong Kong to explore a digital currency cross-border payment project together.
China’s version of a sovereign digital currency, the so-called Digital Currency Electronic Payment (DCEP), will be used to simulate everyday banking activities including payments, deposits and withdrawals from a digital wallet. The use of a digital currency could also make it easier for the central bank to “print” new money since the PBOC would only need to release new digital yuan rather than actually printing real money. The operators are commercial banks that have been approved to provide digital wallet and e-CNY exchange services to the public. The e-CNY, also known as the digital yuan and officially called the Digital Currency Electronic Payment (DC/EP), is a digitized version of China’s legal currency, the renminbi (RMB).
On the other hand, one of the benefits of choosing e-CNY, according to the PBOC, is the increased security and privacy that it offers. However, there are channels through which foreigners can buy and trade in physical RMB – such as buying RMB in cash or buying RMB currency futures. As the e-CNY has the same value as the physical RMB, this remains an option for foreign investors looking to buy RMB. The e-CNY is a type of Central Bank Digital Currency (CBDC) and is issued by the People’s Bank of China (PBOC). As such, it is not a decentralized currency, and it also does not operate on the blockchain.
Once the e-CNY wallet is set up, the user will be able to enjoy a wide range of services provided, not just by the issuing bank, but also by many other banks and payment service providers. These are called “tier 2.5” institutions, which cannot carry out e-CNY exchanges, but can provide payment and other services to e-CNY holders. China’s answer to the cryptocurrency challenge, the e-CNY central bank digital currency, is set for rapid take-off on its expected launch in 2022. Deutsche Bank’s research team examines the digital currency in detail and provides answers to common questions about e-CNY.
For example, in Zhejiang province, residents can use digital yuan for various public services. Moreover, state-owned banks have started offering digital yuan-based financial products, such as loans and salary payments, further expanding its utility. After the revolution, a great many local, national and foreign banks issued currency. Although the provincial coinages mostly ended in the 1920s, the provincial banks continued issuing notes until 1949, including Communist issues from 1930.
As the digital economy develops, the share of transactions made using cash is rapidly declining in China. In addition, as the e-CNY is technically China’s legal tender, it is illegal for any merchant to refuse this as a payment option. Merchants can, however, choose to refuse other payment options, such as WeChat Pay or Alipay. The Digital Yuan was rolled out to prevent monetary substitution from Libra and cryptocurrencies like Bitcoin, which was one of the original reasons. In a progress paper from the People’s Bank of China, cryptocurrencies are specifically cited as tools that “pose potential risks to financial security and social stability.”
