DCEP：Are you ready for China’s DCEP?
Author： Samantha Lin
DCEP (digital currency electronic payment), is a central bank digital currency (CBDC) project led by the People’s Bank of China. It is part of the response to President Xi Jinping’s push to “seize the opportunity” of blockchain technology.
China might be the first country in the world to issue sovereign digital currency. With the upcoming implement of DCEP, what are the impacts on the daily life and production of citizens and enterprises, the state's macro-economic governance, and the cross-border payment and settlement of RMB? Here we try to give out answers to all your concerns.
What impact will DCEP have on China’s economic and monetary policies?
In terms of economy, digital currency is conducive to improving the central bank's timely grasp of macroeconomic dynamics. Due to the lack of detailed tracking records of the physical money, the central bank has a delay in mastering the macroeconomic operation. Digital currency creates a real-time and comprehensive perception for the central bank by recording every transaction in detail. Further, the central bank can make more accurate and timely analysis and prediction of macro-economy through cloud computing, big data and other tools.
In terms of monetary policy, digital currency will have an impact on the traditional monetary derivative mechanism. On the one hand, compared with the traditional banknotes and coins, the digital currency system has a higher clearing efficiency, which will reduce the funds in the clearing account and the third-party reserve account, which is equivalent to the increase of funds for credit; on the other hand, because of the more efficient and convenient payment characteristics of the digital currency, it will reduce the residents' preference for funds, thus reducing the leakage rate of funds, and ultimately increase the money multiplier. The transmission of monetary policy mainly includes four channels: interest rate, credit, foreign exchange and financial asset price, among which interest rate is a very important channel. Because DCEP can calculate interest differently or even break the lower limit of zero interest rate, it is expected to broaden the space for monetary policy adjustment. Additionally, only the government will have control of the blockchain ledger rather than distributed across the system. DCEP will follow the normal model of paper money. In fact, the government will integrate into the commercial ecosystem. The Chinese payment system will also effectively reduce initiation constraints due to time lags.
Will DCEP contribute to the international monetary status of RMB?
At present, the world has entered a new era of information technology represented by big data, cloud computing, 5g and so on. As a carrier of various information, currency is bound to develop towards intelligent digital.
The issuance of DCEP is conducive to protecting the currency sovereignty of RMB in the world and improving the RMB cross-border settlement system. The emergence of DCEP, on the one hand, meets the public's demand for security; on the other hand, the emergence of private digital currencies such as Facebook's Libra has undoubtedly sounded a wake-up call for national currency sovereignty. As a payment tool, Libra may further break away from the reserve assets, become a credit currency, and then develop into a world-class super sovereign currency, which will have a huge impact on a country's monetary policy and sovereignty.
In addition, at present, China's cross-border settlement still relies heavily on the U.S. Global Interbank Financial Telecommunication Association (Swift) and the New York Clearing House interbank payment system (chips). The central bank's issuance of digital currency is expected to get rid of the dependence on the existing swift and chips payment system, improve the RMB cross-border settlement system, and facilitate the RMB to go international. So far, nearly 60% of the world's foreign exchange reserves are still denominated in US dollars. With the advent of digital and intelligent era, the relationship between the real world and the virtual world is gradually expanding. The issuance of DCEP by the Central Bank of China is conducive to improving the international penetration capacity and use efficiency of RMB.
What changes will DCEP bring to China's internal, cross-border payment and international trade settlement?
For the inside of China, DCEP is the replacement to M0, that is, the replacement of existing paper money. Therefore, digital currency has the same monetary basic functions as paper money, such as value scale, circulation means, payment means and storage value. The current Alipay and other electronic payment are based on the existing bank account system, payment tools which electricized the M1 and M2. Therefore, digital currency is essentially different from the existing third-party payment.
Compared to physical money, DCEP has its distinctive pros. For the government, a digital yuan could eliminate money printing costs. For commercial banks, DCEP could facilitate more money transactions with lower costs, increase business innovation while minimizing the risks. For the public, DCEP could save them from indirect transaction fees for interbank transfers. Domestic and cross-border payments will also involve less friction.
What it means for the cryptocurrency markets?
We can imagine that the launch of DCEP will broaden society’s acceptance of blockchain technology and diminish people’s prejudice against it. With a better understanding and real-life applications of this ground-breaking technology, the traditional investment community may become more open to blockchain investments. This potential shift of attitude could bring a positive impact to the existing crypto space. Although there are concerns over the current stable coin space, however, it seems that it is too early to assess how DCEP could affect the stable coin markets.
Experts analyzed that the novel coronavirus pneumonia has made many countries' digital commerce formats such as e-commerce develop rapidly. For the sake of health security and efficiency, it is expected that the research and development process of digital currency of central banks will also be accelerated.
It can be expected that digital currency will build a more secure, reliable and intelligent new payment system for Global trade, thus driving the intelligent transformation of the industry.