With the use of the digital currency now being tested, China is moving ever closer to an official launch date for the issuance and supply of a central bank digital currency
China has started testing its government-backed digital currency in some regions before it is introduced to the public, aiming to replace paper notes and coins in circulation, according to the People’s Bank of China, the central bank.
At present, the trials are being conducted in a closed environment and not connected to the existing sovereign currency issuance and circulation system. Pilot programs have been launched in Shenzhen, Suzhou, and Chengdu, as well as in the Xiongan New Area, Hebei province, said a senior official from the digital currency research institute of the PBOC, who did not want to be identified.
Some of the payment scenarios related to the Beijing 2022 Winter Olympics are also undergoing tests, he said.
“In the short term, the central bank’s digital currency will not be issued in large amounts for the public and the velocity of the money in circulation will not be influenced or lead to an inflation surge,” said a statement on the PBOC’s official WeChat account on Saturday.
The PBOC will be the sole issuer of the “digitalized renminbi“, and will originally offer the digital money to commercial banks or other operators, which is still in a centralized issuance system. The public can transfer the money in their bank accounts to the digital version and deposit the same in “electronic wallets”, the official said.
To avoid excessive money issuance, commercial institutions should set aside provisions equivalent to their digital money holdings, he said.
The PBOC started research on its digital legal tender in 2014. The State Council, the nation’s cabinet, approved the PBOC’s digital currency development program at the end of 2017, jointly with some qualified commercial banks and institutions. The central bank called the new money as “digital currency and electronic payment”, or DC/EP.
Zhou Xuedong, a spokesman of the central bank, disclosed at a news conference on April 10 that the digital currency launch has not been disrupted by the novel coronavirus outbreak.
The COVID-19 epidemic can persist for a few hours on hard surfaces, and there is probability of transmission via physical money－paper notes and coins, as they are frequently touched objects. The pandemic has led to unprecedented public concern about viral transmission via cash. Many central banks have taken measures to ensure the safety of using cash.
Raphael Auer, an economist with the Monetary and Economic Department of the Bank for International Settlements (BIS), said that in the context of the current global health crisis, central bank digital currency (CBDC) would in particular have to be designed with access options for the layman and have contact-free technical interfaces suitable for the entire population.
“The pandemic has highlighted the value of having access to diverse means of payments, and the need for any means of payments to be resilient against a broad range of threats,” he said.
Payments via the upcoming Chinese sovereign digital currency could be contactless and the transaction can be achieved when two mobile phones with electronic wallets get close to each other, Mu Changchun, head of the PBOC digital currency research institute, said earlier.
Different from Alipay and WeChat Pay that rely on the internet, the technology used by the PBOC allows the digital currency to be exchanged without the internet, just like using physical cash, said Mu.
China could be one of the leading countries in the world to have a retail-based central bank digital currency, said analysts.
Reports that China’s central bank, the People’s Bank of China, has already started internal testing of its digital currency in cities including Suzhou, Shenzhen and Xiong’an indicate that the new form of payment will likely be launched in the near future, as the country is picking up pace in its bid to become a global forerunner in the sector.
To put it simply, the central bank digital currency will be the electronic form of the renminbi, with value equivalent to the paper notes and coins in circulation, according to a document released by the PBOC Currency Research Institute. Drawing on the experience of core blockchain technology, the digital currency could change the financial system in big ways — by cutting costs and making transactions easier, more convenient and more transparent.
Unlike decentralized cryptocurrencies, such as bitcoin, that allow users to transfer value with no central authority or third party involved, the government-backed digital currency is put under the centralized mechanism of the central bank and thus is as stable in value as its cash cousin.
China has already made a lot of progress in building a cashless society as mobile payments by means of Alipay or WeChat Pay have become an indispensable part of people’s daily life. In 2019, banks handled non-cash mobile payments of 347.11 trillion yuan ($49.27 trillion), up more than 25 percent year-on-year, according to the central bank.
The novel coronavirus outbreak has accelerated the cashless process, as people staying at home because of movement restrictions aimed at containing the spread of the virus have relied on e-commerce platforms and mobile payments to purchase necessities. Many also choose not to use cash at stores or markets because of concerns that the virus might be transmitted via notes or coins. All this has paved the way for the government to usher in the digital currency.
The central leadership has long acknowledged the major role of blockchain technology in the new round of technological innovation and industrial transformation. In October last year, President Xi Jinping called for using blockchain as “an important breakthrough for independent innovation of core technologies” at a key central meeting. The statutory digital currency marks another step forward in the direction that Xi has indicated.
A lot of work still needs to be done, especially in setting the security standards and a regulatory mechanism for the new form of payment. But with the use of the digital currency now being tested, China is moving ever closer to an official launch date for the issuance and supply of a central bank digital currency and a system for interbank settlements that uses the currency.