While central banks have shown interest in developing their own digital currencies after Facebook last year scaled back its Libra cryptocurrency, the People’s Bank of China (PBOC) in Beijing has begun trials of its own in four cities, news outlets reported last week, citing the bank’s Digital Currency Research Institute.
The Chinese-government backed digital currency has not been officially released, but the pilot trials in Shenzhen, Suzhou, Xiongan New Area and Chengdu have drawn attention because of how this currency would function. It has also raised eyebrows regarding how a digitalized yuan would affect Chinese banks and payment service providers, as well as the domestic economy and the global financial market.
In the past few years, China has repeatedly made high-profile claims about its intention to issue the world’s first central bank digital currency, hoping it would promote the yuan’s internationalization and provide its sovereign digital currency with the same status as the US dollar — or even greater.
However, it is anyone’s guess just how and when Beijing intends to do this, because only a few details about the currency have been disclosed since the establishment of the institute in 2014.
As Chinese already commonly use electronic payments through smartphones, why should Beijing pour so much effort to promote a digital currency? Now that the PBOC has confirmed what it calls “digital currency, electronic payment” (DCEP), the pilot program offers a rare peek into how traditional currency in digital form is issued and governed by a central bank.
The institute said that the digital currency has the same value of paper notes and coins in circulation, but as suggested by its name, it is to develop into an electronic payment instrument under the central bank’s control. In light of the increasing prevalence of people using electronic payment services through privately run WeChat Pay and Alipay, the new currency could pose an issue for the Chinese Communist Party (CCP) in terms of capital outflow, money laundering, gambling and terror financing.
China’s goal to launch DCEP ahead of its international peers could reflect its desire to manage the relevant challenges on its own terms, some pundits have said. Developing a government-backed digital currency is not only a technological issue, but a complicated mix of user identities, legal concerns, control over monetary policy and national sovereignty. The use of digital money could not only replace cash in the future, it could significantly affect economic activity and the financial system.
However, unlike decentralized blockchain technology cryptocurrencies, such as bitcoin, that support anonymous transfers digital currencies developed by central banks remain supervised by those agencies and can be tracked electronically.
This has raised concerns: Would the CCP government monitor the behavior of people through the traceable characteristics of DCEP? Could such supervision eventually lead to controlling the behavior of people? Does the CCP intend to retain its long-term control of domestic politics and the economy through its DCEP?
There are no quick answers to those questions, but one certainty is that other central banks might move faster to launch their own currencies. It is a trend to use government-backed digital currencies as a substitute for or to complement bank notes to improve the efficiency of transactions or address the issue of safety in the financial system.
However, those currencies would also have economic, financial and even international political consequences, which deserve everyone’s close attention, including Taiwan’s central bank.
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