As China prepares to become the first country to launch a digitized domestic currency, market participants and experts say it is a testament to both financial innovation and Beijing’s desire to have fail-safe control over its cash economy.
China’s central bank has revealed few specifics of its Digital Currency Electronic Payment (DCEP) project, one that’s been five years in the making, though more details have trickled out over the past few weeks in the bank’s presentations on the subject.
Akin to Facebook’s proposed Libra digital currency and other cryptocurrencies such as bitcoin, the DCEP will be powered partially by blockchain technology and dispersed through digital wallets.
What sets it somewhat apart, however, are features that allow the central bank to track the movement of the currency and even supervise transactions.
The digital currency’s design seemingly provides Beijing with unprecedented oversight over money flows, giving Chinese authorities a degree of control over their economy that most central banks do not have.
The main motivation behind the project, market observers say, is China’s desire to protect its capital borders in the face of fears that newer global payment systems and advanced technology could facilitate illegal cash flows.
“There’s a consensus around the world among central bank governors and governments at large that they want to have control of money and money supply and the seigniorage that comes along with it,” said Keyu Jin, professor of economics at the London School of Economics on the sidelines of a forum in Singapore.
“But over-obsessive control and governance is probably more unique to China than anything else.”
So far, Beijing has sent mixed messages on how soon the digital currency will be launched.
The head of the Chinese central bank’s digital currency research institute, Mu Changchun, told a public forum in August that it was “almost ready”. However, in September, Chinese central bank chief Yi Gang said there was no timetable for its rollout and that it still needed to meet requirements, such as anti-money laundering.
Authorities have, however, made no bones about their disapproval of Facebook’s Libra, labeling it a threat to the sovereignty of China and other emerging economies and insisting that digital currencies should only be issued by governments and central banks.
Mu hinted at these fears and desire to preserve control in his lectures. “Just imagine, if we acquiesce, that yuan can be converted into Libra, there will definitely be a massive currency exchange, triggering yuan depreciation.”
The People’s Bank of China (PBOC) did not immediately reply to Reuters questions on its digital currency plans.