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China’s Large-scale Digital Currency Testing

According to China’s English language official media CGTN, four major state-owned banks, including the Bank of China, China Construction Bank, the Industrial and Commercial Bank of China, and the Agricultural Bank of China, have started testing digital currencies in Shenzhen, a signal of the upcoming introduction of the digital renminbi (the name of the Chinese currency).

Years ago, China formulated a plan for the central bank to issue legal digital currency. Since 2014, the government has planned to replace cash with digital currency, but has yet to announce a clear time table. On August 3, the People’s Bank of China (PBOC) announced that it would “actively and steadily advance the research and development of the legal digital currency” in the second half of the year. Back in 2016, Zhou Xiaochuan, then governor of the PBOC, China’s central bank, stated that he planned to spend 10 years to digitize the banknotes which have been in use in the country for more than 800 years.

The PBOC’s digital renminbi is temporarily named “DC/EP” (the abbreviation of “digital currency/electronic payment”). At present, the employees of some state-owned banks have begun to use it for transfers, payments, and other transactions.

Users, after registering in a mobile app, can use a digital wallet to recharge, withdraw, transfer and scan QR codes to pay. Transfer can be done only based the other party’s mobile phone number. The PBOC is studying a scenario of money transfer without a network.

Didi Chuxing, the country’s app-based transportation services giant, said last month, that it established a “strategic cooperation agreement” with the PBOC. With 450 million Didi users, the PBOC hopes to use this huge platform to test the application of digital renminbi in the field of smart travel. In addition, it is reported that Meituan, a food delivery platform that generates billions of dollars of daily transactions, is currently negotiating with PBOC on digital renminbi.

According to Mu Changchun, director of the Digital Currency Research Institute of the PBOC, who is regarded as one of the leaders of China’s digital currency plan, “As long as you and I have a DC/EP digital wallet on your mobile phone, you don’t even need the Internet. As long as your phone has power, you can transfer the digital currency from one person’s digital wallet to another by touching the two phones.”

In April this year, China announced that it will conduct internal testing of digital currency in four main locations — Shenzhen, Suzhou, Chengdu, and Beijing’s new satellite city Xiong’an. A PBOC official disclosed that a larger scale test will also be conducted during the 2022 Beijing Winter Olympics to further evaluate the capabilities and risks of digital currencies through large-scale cross-border transactions.

Although the new currency is to be issued by the PBOC, ordinary people still need to deal with state-owned and commercial banks. In April, a screenshot of the digital currency wallet application test by the Agricultural Bank of China was circulated on the Internet. The screenshot is said to show a variety of functions, including QR code payment, remittance, currency exchange, and “touch” transfers. PBOC officials said that the digital currency will adopt a two-tier operating system. The PBOC will interface with commercial banks, and the commercial banks will be directly interfacing with ordinary people.

Although Beijing’s enthusiasm for digital currency began a few years ago, it is the Bitcoin market and the “Libra” digital currency plan that the US technology giant Facebook initiated that accelerated the process.

Mu Changchun said frankly in an open class, “If Libra is accepted by everyone and becomes a common payment tool, then it is completely possible for it, ultimately, to develop into a world-class super-sovereign currency.”  “In order to protect our currency sovereignty and legal currency status, we need to plan in advance.”

The digital renminbi being tested is the equivalent of paper currency in value and they may be exchanged freely with each other. Unlike Bitcoin and other encrypted digital currencies based on blockchain technology, the PBOC is the currency issuer and requires real name user registration. Senior officials at the PBOC stated that, after the introduction of digital currency, payment data will be anonymous, but this anonymity is “controllable” and the government and banks still have the right to inquire.

Wan Hui, the founding partner of Primitive Ventures, a blockchain investment institution, wrote in an article that, in the traditional sense, the central bank can only directly control the creation and destruction of the base currency, but can only exert indirect control over the broader money supply driven by credit flows. If digital legal tender is issued, the central bank may bypass commercial banks and regain direct control over currency creation or supply. She believes that this will allow China’s central bank structurally to centralize the power to formulate and implement related monetary policies, and it can affect social and economic activities at a more granular level.

Source: BBC Chinese, August 11, 2020