BY Sarthak JAIN
The last decade saw the transition from a hard cash world economy to a cashless one, primarily driven by the fintech startups and cryptocurrency. In the recent times, the introduction of state-backed digital currency by PBoC (People’s Bank of China) designed to replace the cash(banknotes and coins) in circulation has fuelled the already blazing ‘cashless economy transition’.
The Chinese government initiated the research for national digital currency in early 2014, but it escalated in 2017 leading to a series of pilot programmes of digital yuan,which was officially termed as DC/EP (Digital Currency Electronic Payment) in late 2020. It uses distributed ledger technology which validates transactions without the need of a central bank. The ability to facilitate offline transactions through N.F.C. (near field communication) technology and online by Q.R. code provides the same convenience to the end-user as offered by existing mobile payment wallet.
Reasons for introducing the digital currency:
Threats
Unlike the western economies where traditional banking breeds the finance system, Chinese government witnessed multitudes of warning signs, for example, the increase in popularity of e-wallets, digital payments and financial services offered by behemoths like Alibaba’s Alipay and Ant finance and Tencent’s Wechat and their significant monopoly (54% – Alipay, 39%-WeChat ) in mobile payment, causes systematic challenges to the sovereignty.
The dependence on the S.W.I.F.T (The Society for Worldwide Interbank Financial Telecommunication) system which provides a network that enables financial institutions to send and receive information about financial transactions and the history of U.S’s hold over the S.W.I.F.T., worried the top brass of Chinese officials and hence an alternative to the system was required. Additionally U.S.’s declaration of a trade war increased the risk of china’s financial sanctions and exclusion from the international financial ecosystem. On the other hand, in the long term, the rise of crypto-economy also threatened the regulation of money by the financial institutions, leading to the ban of cryptocurrency in China.
Opportunities
DC/EP’s legal tender status obliges vendors to accept it for transactions, which challenges to break the monopoly of Alipay and WeChat, thereby replacing their status of middleman with PBoC (People’s Bank of China). The simple process of linking phone number with digital wallet and digital payment-centric consumer behaviour eases the currency’s mass acceptance process. Chinese authorities believes it will help the central bank to track the flow of money on macro-level and have control over the capital market which in turn will allow to prevent tax evasion, track money laundering, monitor terrorist funding, trace each transaction to an individual and form better policies through an understanding of citizen’s spending habit. With the largest unbanked population globally, DC/EP will be at the forefront of promoting financial inclusion by bringing the unbanked population into the mainstream economy. With the latest development on digital yuan, the tourists gain a promising advantage through the use of DC/EP as due to the extensive use of Alipay and WeChat, tourists often find it difficult to transact in China but with DC/EP tourists can download the app and add their respective currency which will automatically be converted into renminbi (China’s official currency like ‘pound sterling’). The global acceptance and dominance of the U.S. dollar undermine China’s second-biggest economy status. U.S. dollar accounts for 88.3% of all international transactions. In comparison, the renminbi has only 4%. To internationalise the renminbi, China is looking for different strategies. The recent joint venture between S.W.I.F.T. and both the Digital Currency Research Institute and PBoC could drive renminbi to international reserves.
Implementation
To propel the use of currency, different city governments handed out a total of 100,000 yuan(11,27,592I INR approx) in a virtual red envelope ( signifying Chinese new year tradition ) through a lottery, each containing 200 yuan (2,256 INR approx.). The South-Asian giant rolled out DC/EP(Digital Currency Electronic Payment ) on major E-commerce platforms. Merchants like Starbucks, McDonald’s, DIDI Chuxing (ride-hailing app), MeituanDianping(food ordering app) were the early adopters. The government can channelise this financial development with the citizens either in the form of pensions or government official’s salaries or through different transactions with the government. In the past decade China has successfully built strong trade relations with numerous countries, infrastructure development strategies like Belt and Silk Road initiative(B.R.I.) or its trade partnership with the African continent, will boost the process of internationalising DC/EP. China’s Ministry of Commerce’s announcement of testing digital yuan in several new regions, including the Great Bay Area, Integrated economic hub in Hong Kong, Macau and nine Pearl River Delta Cities are few of the indicators.
All the major economies like U.S.A., Japan, E.U, Canada and India are examining the possibility of the state-backed digital currency, but because of the presence of strong traditional banking and individual’s privacy being a national issue, other major economies are analysing as well as learning from China before enacting anything. Although China is not the first one to launch its digital currency, Cambodia and Bahamas have already launched their currency named Bakong and Sand dollar respectively, but the economic disruption by the Chinese currency is loudest.
Conclusion
The recent suspension of Ant finance I.P.O. and Jack Ma’s absence from the public view demonstrate the power Chinese authority entails over the regulations. DC/EP eliminates the threat from own domestic tech giants, influence the position of the renminbi in the international market, and terminates the adoption of crypto in the long term hence putting it at the forefront in the race of digital currency adoption and domination. But with all its glitters, the buoyant and potent trait also curtail the dreary side, i.e., it helps the government to track each and every transaction of its citizens, create a detailed profile of the citizens based on the shopping habits and even freeze assets and block transactions the government doesn’t approve of. This sounds dystopian to say the least, but considering the country’s human right record, it is for one to decide.
ABOUT THE AUTHOR
Sarthak , a bachelor of commerce student at Kirori Mal College is a finance enthusiast. His area of interest varies from business finance to stock market and from the upcoming fintech space to psychology. He is a very responsive listener who is always up for discussion and debate upon national and international affairs.
Disclaimer: The views expressed in this article are the author’s own and do not necessarily reflect the views of the organization.
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