Unlike Facebook’s Libra project, China’s digital yuan does not pose a threat to the global financial system. If it goes into circulation, it will facilitate international payments and make instant currency conversion possible, says Zhou Xiaochuan, former governor of the People’s Bank of China.
The digital yuan is not intended to crowd out the dollar or other fiat currency, says the economist.
This is the first time that Zhou Xiaochuan has spoken publicly about the Chinese digital currency project. Zhou, who led the Bank of China for a record 15-year period, became famous for his innovative approach to the financial sector. Under his leadership, some steps were taken to partially liberalize the yuan exchange rate, leading to its inclusion in the reserve currency basket in 2016.
Furthermore, Zhou was one of the first top officials in the world to question the credibility of the dollar-centric financial system after the 2008 crisis.
The development of the digital currency began in 2014 when Zhou was still head of the People’s Bank of China. He is considered the ideologue of the project, since the digital yuan or Digital Currency Electronic Payment, DC/EP or DCEP, as it is officially called – implies the creation of a fundamentally new payment system that will be issued in two stages: from the Central Bank to commercial banks, and from commercial banks to the public.
Screenshots of DCEP digital wallets leaked online suggest that their user interface closely resembles mobile payment systems that have spread in China, such as Alipay and WeChat Pay, but with one significant difference. These programs are transfer claim rights, whereas the digital yuan is a complete analog of fiat money with all the functions of cash and the same sovereignty.
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Zhou has also revealed what are, in his opinion, the most important benefits of the DCEP. He stressed that cross-border payments are mostly made in a non-monetary way, either through credit cards or mobile payment systems. However, currency conversion, as well as the transactions themselves, are not always instantaneous and the process is quite complicated.
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If the digital yuan allows these procedures to be performed synchronously and instantaneously, it would be a significant improvement in the international system of collections and payments. In addition, payments through the digital yuan will be more secure and accessible to the general population, Chen Fengying, an expert from the Chinese Institute of Contemporary International Relations, expressed his opinion in an interview.
“It can be said that the digital yuan, as a replacement for M0, will mainly serve as a means of payment and cash in circulation. For ordinary people, it will be a more secure means of payment, much more secure than the current Alipay and WeChat payment systems. Digital currency can also be used without an internet connection. This is a very great advantage since existing mobile payment systems require being online to carry out a transaction,” the expert stressed.
According to Chen, mobile payments proved effective during the COVID-19 pandemic, when economic activity shifted online due to lockdowns. However, the problem of digital inequality remains. For example, there are videos of seniors without an internet-connected smartphone facing difficulties in obtaining the full range of financial services. The digital yuan should solve this problem: the system will work both through the internet connection and through automatic RFID identification – radio frequency identification.
It is cross-border use that can really unlock the potential of the digital yuan, Chen adds.
“I would like to point out that I am optimistic about future development rather than the current situation. Because right now the digital yuan is only the monetary aggregate M0. But if the DCEP is used for cross-border payments, it will significantly reduce the costs of transactions and it will increase the convenience of making payments”, emphasizes the specialist.
Now, due to currency fluctuations, trading and investment activities are severely limited, but using a digital currency in trading can avoid the impact of currency volatility, he believes.
The digital yuan will first be used in China, but not before 2023. It could be tested on a broader level involving foreign guests during the Winter Olympics to be hosted by Beijing in 2022.
Zhou Xiaochuan stresses that China does not seek to bring digital yuan internationally and thus change the international financial architecture. As the experience of Libra – Facebook’s proposed digital currency – has shown, ambitions that are too bold at the international level can provoke a harsh reaction from regulators and financial authorities in different countries.
The Libra project, which was originally supposed to cover 2.3 billion Facebook users around the world and operate on the basis of a closed blockchain system managed by a consortium of 100 companies, failed even before it was born because the central banks of different countries, including the US Federal Reserve, they decided that Libra is a threat to financial stability. As a result, the main backers of the project, such as Mastercard and PayPal, withdrew.
That is why China will take into account the sad experience of Libra and will not impose its own financial innovations on the rest of the world, Zhou concluded.