Whenever anybody talks about digital currency or cryptocurrencies, the first country that comes in our mind is China. Chinese CBDC is not something that came all of sudden as the country has been planning to launch one since 2014 only. Xiaochuan Zhou, the People’s Bank of China (PBoC) governor has established a Digital Currency Research Institute. The major purpose of this institute was to research the proper use of cases of CBDC for PBoC.
During that time, Yi Gang, the governor of PBoC has said that they have been planning to launch a currency that is quite different from Bitcoin. According to him, Digital Currency/ Electronic Payments (DCEP) is not meant to replace or disturb any other part of the money supply.
The reason behind introducing Chinese CBDC
Back when PBoC has planned to introduce CBDC, it has specified the major reason behind introducing the digital currency. With the digital payment system, the government will be able to track the cash transactions easily. By tracking the cash transactions, the government will be able to tackle illegal gambling, terror financing, and money laundering.
Along with this, the PBoC has also aimed to improve the overall efficiency of transactions across the financial system by introducing CBDC. The main purpose of launching Chinese CBDC was to reduce the dependency of the country on the US Dollar. This will be made possible through cross-border transactions between different countries that Chinese CBDC will facilitate.
Development and deployment of Chinese CBDC
The very foundation of Chinese CBDC was laid back in 2014 only when PBoC established the Digital Currency Research Institute. Even though the government has planned it way too back, the development of CBDC started rapidly in 2019. It has been announced that China has successfully completed the infrastructure of DCEP and is currently going through different trails for the currency. The country has also specified that they did not develop their digital currency for speculation as it is far beyond that.
According to the official announcements, there will be four pilot institutions for DCEP which include the Agricultural Bank of China, Bank of China, China Construction Bank, and the Commercial Bank of China. In the initial stage, there will be an official production test for the complete digital currency system. The major purpose of this official production test will be to validate the network and security of CBDC. Once this phase will be successfully completed, the government will be distributing the digital currency to some large fintech companies.
The official sources also reveal that there will be a two-tiered system for both issuance and distribution of Chinese CBDC. In the first tier, all the transactions between the bank and the intermediaries (the four pilot institutions). There will be several other intermediaries as well which are the non-financial ones Alibaba, Tencent, and few others. After this will come the second tier in which the transactions will happen between these intermediaries and the retailers. This will ultimately help the distribution of DCEP across the whole market easily. It has been specified that DCEP will be transferred using the electronic wallets and not the bank accounts.
Testing of DCEP
Recently, Chinese national television has confirmed the announcement of the trials of DCEP. This is a pilot testing that will first be held in Shenzhen, Chengdu, Suzhou, Xiong’an, and a few other locations. It has been specified that before expanding the pilot testing on a larger scale, there will be a need to tackle several technical difficulties and the issues related to the promotion of the currency. Currently, the PBoC has planned to expand the trails to 28 cities and provinces across the country. This will cover around 400 million people China from the 28 cities and provinces.
It is also revealed that several foreign firms like McDonald’s, Starbucks, and Subway will also be part of the testing of Chinese CBDC. This was announced in the National Development and Reform Commission’s event which was held on April 22, 2020.
In order to make it a successful launch, the government has also announced that it is mandatory for all the retailers/merchants who have been accepting digital payments, to accept Chinese CBDC as well. Through this, there will be greater adoption of the digital currency across the country which will eventually turn out to be a successful launch.
As it is mentioned above that this is a six-year-long project by the Chinese government and they are trying their best to roll out as soon as possible. With this launch, China will become the first major country to introduce its CBDC. Even though this is going to be a huge launch for China, it might occur as a threat to the US. If the Chinese CBDC will process cross-border transactions with different countries, it might reduce the dominance of the US Dollar which is a direct threat to the US.