How does a legal tender issued by a central bank differ from payments guaranteed by a third party operator?
the story So Far: In February, China began the latest round of pilot trials for its new digital currency, with plans for a major roll-out by the end of February and ahead of the Winter Olympics in Beijing in February 2022. Digital currencies, recent trials in many cities in China, have placed it ahead of the curve and focused on how the digital tender issued by the central bank can affect the world of digital payments.
How does China’s digital currency work?
Officially titled Digital Currency Electronic Payments (DCEP), the digital RMB (or Renminbi, China’s currency) is, as its name suggests, a digital version of China’s currency. It can be downloaded and exchanged through an application authorized by the People’s Bank of China (PBOC), the central bank of China. China is among a small group of countries that have initiated pilot testing; Others include Sweden, South Korea and Thailand.
How is it different from e-wallet?
Unlike e-wallets like Paytm in India, or Alipay or WeChat Pay, which are the two major apps in China, digital RMB does not include third parties. For users, the experience may feel roughly the same. But from a “legal perspective”, the digital currency is “very, very different”, explains Santosh Pai, an honorary fellow at the Institute of Chinese Studies (ICS) in New Delhi and a corporate lawyer researching Chinese regulations. It is a legal tender offered by the central bank, not a payment made by a third-party operator. There are no third-party transactions, and therefore, no transaction fees.
Unlike e-wallets, digital currency does not require internet connectivity. Payment is made through Near-Field Communication (NFC) technology. Also, unlike non-bank payment platforms, which require users to link bank accounts, it can be opened with a personal identification number, Dong Ximiao, a think-tank researcher with the Asian Financial Cooperation Association , Told Chinese media, meaning “China’s unbanked population could potentially benefit”.
How is it being widely used in China?
Following tests initiated shortly after the outbreak of the COVID-19 pandemic last year, 4 million transactions worth $ 300 million used digital RMB, PBOC said in November. In the latest round of testing in February to coincide with the Chinese New Year holiday, Beijing distributed around $ 1.5 million in currency through a lottery to residents, with each virtual “envelope” worth 200 RMB (about $ 30) Sent to every resident.
Shenzhen and Suzhou were the other cities that distributed the currency as part of the pilot trials, which the Ministry of Commerce said would be expanded in the coming months, with an extensive roll-out expected ahead of the Winter Olympics.
What are the reasons behind the push?
The test matches the steps of Chinese regulators, including some of Alibaba’s Internet giants, behind Alipay, and Tencent, which owns WeChat Pay. A recent report by the Center for Strategic and International Studies (CSIS) stated, “Digital payment platforms have helped facilitate commerce in China, but they have put the country’s money in the hands of some technology companies.” “In the fourth quarter of 2019, Alibaba controlled 55.1% of the market for mobile payments in China. Tencent controlled another 38.9%. “
Mu Changchun, director general of PBOC’s Digital Currency Institute, said that a key objective of China’s sovereign digital currency should be “maintaining financial stability, which should be something Alipay and WeChat Pay”, South China Morning Post. Chinese regulators have also seen the rise of cryptocurrencies in a wild way.
The central bank-issued digital RMB will turn the logic of decentralized cryptocurrency on its head, giving the regulators complete control over the transactions, without the secrecy and anonymity that they offer. There are also global inspirations. “Beyond China’s borders, the DCEP can help facilitate the internationalization of the renminbi,” the CSIS report states.
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