Chinese authorities are testing the digital yuan: is it worth waiting for the digital dollar?

The development of the digital renminbi is proceeding rapidly: a few days ago it became known that companies and customers of the largest banks in several cities of China were testing it. Moreover, corporations such as McDonald’s and Starbucks will take part in the test, among others. + Why is China in a hurry to release a national cryptocurrency, at what stage is the development and why its main opponent is not Bitcoin or Libra from Facebook, but the US dollar, DeCenter found out.

For a long time, almost nothing was known about China’s national digital currency (DCEP), or the digital renminbi, except that the Chinese authorities were working on it. Information was officially confirmed only in 2018. Moreover, it turned out that research and development have been ongoing since 2014. And in the summer of 2019, the deputy head of the department of the National Bank of China (NBK) Mu Changchun, who is called the main ideologist of the digital renminbi project in power, said that he was “almost ready.” This was preceded by the sensational announcement of the cryptocurrency project Libra from Facebook, which officials in many countries took with hostility.

Cryptocurrencies have pushed the Chinese authorities to create DCEP by the growing competition with fiat currencies. Despite the formal ban on cryptocurrency exchanges and ICOs, Chinese people are still actively using crypto assets. The digital yuan could be an alternative to decentralized coins. In addition, the main capacities of world mining of the Bitcoin network are concentrated in China, the blockchain startup industry is developing rapidly and with government support. Such a contradictory and motley picture.

According to the professor of Fudan University, Michael Song, the real impetus for accelerating the development of the digital renminbi was not so much the Libra coin, but the keynote address by President Xi Jinping in October 2019. Then he called on officials to “make every effort” to develop the blockchain and introduce solutions based on it into the real economy. At the same time, Xi noted the importance of implementing technology in digital finance. According to Song, this was a signal for central authorities to accelerate the release of DCEP and facilitate its distribution in China and beyond.

Mobile App First

But the real details about the digital yuan became known recently, in April. Then, WeChat published screenshots from the test mobile application of the Agricultural Bank of China (SBC) for operations with DCEP. Some of the application’s functions were visible on the screenshots: wallet, the function of payment via QR-code (a popular payment method in China), receiving and sending money, as well as “pairing” wallets of two users for transactions through the convergence of devices (probably using NFC-technology)

Mobile app interface for the RMB

Later, the NBK confirmed the authenticity of the screenshots and added that the digital renminbi is being tested in cooperation with several commercial banks, and its territory is limited to four major cities. As The Block later clarified with reference to Chinese media, in one of the cities — Suzhou — municipal officials in May will receive half of the subsidies for travel on public transport in “digital yuan”.

The authorities did not disclose the official launch date for DCEP but added that the next test of the digital national currency will be held in 2022, during the Beijing Winter Olympics. Probably, then the scale of the test will be much larger and will also affect foreign citizens.

It is curious that on the same day, the State Committee for Development and Reforms of the PRC — the former Gosplan, now in charge of strategic economic planning, announced the inclusion of blockchain in the national technology development strategy. Now it is a priority for the state along with other promising areas, such as artificial intelligence, cloud computing, and the Internet of things.

Commerce and trading in the digital yuan

The NBK has not limited to banks and individual users of the digital yuan: thanks to a report from the Chinese publication InterChain Pulse, another test was revealed, but with the participation of almost two dozen companies. The project will be held on the territory of the New Xun’an District (something like a special economic zone, but an urban-type).

The project includes companies in the field of catering, retail, transport, and entertainment. The list also includes American companies McDonald’s, Starbucks, and Subway, as well as a number of local chains: fast food Qingfeng Baozi, supermarkets JD (operated by the leading online retailer of the same name in China), Jinfeng cafe and others. Four state-owned banks provide financial infrastructure, as well as fintech giants Ant Financial (formerly Alipay) and Tencent. Administrative support is provided by local governments.

Xun’an — a kind of testing ground for the “digital city”. All government services have already been digitized here, 5G mobile networks, unmanned vehicles, and much more are used. At the end of March, a blockchain laboratory was opened in the city, which will be engaged in the implementation of DLT-based solutions in urban infrastructure and services.

At the same time, InterChain Pulse did not provide data on the date of the start of the digital renminbi experiment in Xiongang or the timing of its implementation.

Ram against the dollar

Given that the digital yuan is a project of the Chinese authorities, it is not surprising that, in addition to domestic economic interests, they also pursue political goals. Namely, the victory over the global “hegemony” of the US dollar. So, the DCEP developer Mu Changchun in September last year said that “the digital yuan is necessary for China to protect the monetary sovereignty of the country”.

The Ledger Insights portal cites an article by the Chinese political science center Zero One Think Tank, which states that the digital yuan will help “internationalize” the Chinese currency. In particular, through transactions in large-scale foreign economic projects of the PRC. Among them is the One Belt, One Road initiative, which brings together many of China’s neighbors as part of the Silk Road Economic Belt and the 21st Century Sea Silk Projects. The high scalability of DCEP will solve the problem of increasing the share of settlements in RMB in foreign trade. So far, China has failed.

State-owned Chinese companies already have the infrastructure needed for cross-border operations in the digital yuan. For example, last fall, the Chinese Construction Bank (the third largest in China) released the second version of its financial blockchain platform for international settlements after the volume of operations on it exceeded $ 50 billion. The platform users are mainly foreign banks and Chinese exporters.

All four major Chinese state banks, which recently announced their participation in the project for the commercial testing of the “digital yuan” in Xiongang, have their own foreign trading platforms based on a distributed registry.

Digital dollar

The U.S. currency really dominates global finance: in 2019, 90% of international transfers and 60% of government reserves were in US dollars, while the yuan in both segments accounted for only 2%. Such data are quoted by Voice of America.

The dollar is needed by private companies and banks to hedge the risks of depreciation of national currencies in international transactions. However, the widespread use of the dollar also gives the US government leverage — for example, with the introduction of economic sanctions.

The emergence of alternative international currencies could undermine US influence. In a commentary on Voice of America, Special Assistant to President Tim Morrison expressed confidence that Beijing’s intention to “dominate this new financial technology should be alarming”, referring to cryptocurrencies.

Apparently, while the US authorities do not plan to issue their own digital dollar.

In late February, speaking in the Senate, US Treasury Secretary Stephen Mnuchin said that Washington does not intend to issue a national cryptocurrency at this time, but may return to this issue in the future.

The day before Mnuchin’s statement, Jerome Powell, the head of the US Federal Reserve System, spoke in the House of Representatives. Congressmen called on him and colleagues in the government’s financial bloc to step up work on the digital dollar until they got ahead of the Chinese. Powell replied that the conditions in the USA and China are different: “For example, the idea of a registry where everyone will see each other’s transactions is unlikely to be attractive in the context of the United States. This is not a problem for China.”

As for Libra, last year’s announcement of which was accompanied by mass criticism of Western officials, on April 20 an updated version of the white paper project was released. In the new document, the developers officially abandoned the concept of a single global stablecoin, decentralization, and anonymity and pledged to comply with all regulatory requirements.
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