Last month, 47,573 lottery winners in Shenzhen, China, were each paid 200 yuan (US$29.90 at the current exchange rate) via digital transfers directly into their smartphones. They had to spend the money within one week at 3,389 participating stores in the city’s Luohu District — and spend they did, shelling out 8.8 million yuan in 62,788 transactions.
The experiment showcasing China’s Digital Currency/Electronic Payment (DCEP) system was the latest and flashiest in a series of trials since April for the new “digital yuan.”
Many observers have been raising the alarm over what they see as an escalation of Beijing’s campaign to challenge the dominance of the US dollar, although this is not the program’s only goal.
While there is cause for concern, it is important to understand Beijing’s intentions to create effective mitigation strategies.
In the short term, the effects of the DCEP are to be local and only present a minor departure from the norm, although in the long run it could bring millions of people around the world under Chinese Communist Party (CCP) control.
Similar to cryptocurrencies, DCEP transactions can occur between two users through digital wallets without requiring a bank account. However, unlike cryptocurrencies, it is issued and backed by the People’s Bank of China, making it more stable and immune to speculation.
China’s monetary landscape is already dominated by tech firms Tencent and Alibaba, with their respective WeChat Pay and AliPay services, priming Chinese to take up a centralized digital payment system.
By the same token, Tencent and Alibaba’s growing control of the Chinese public’s finances threatens the CCP, even if they are closely regulated. With the DCEP, Beijing could leverage the firms’ technical networks while simultaneously wresting away control.
The system could also do wonders for tackling another looming challenge to domestic stability and therefore CCP rule: financial crime. As all DCEP transactions are recorded, it would make counterfeiting, illegal financing and other crimes nearly impossible.
The other side of the coin is government surveillance. Transactions deemed improper by China could be blocked and dissidents’ digital wallets frozen.
In the medium term, Beijing likely hopes to leverage the DCEP to bypass the SWIFT system, which is heavily influenced by the US and its allies. China in 2015 introduced its own “Cross-Border Interbank Payment System,” although the DCEP appears to be an early move to consolidate yuan primacy in a digital currency-based transfer system.
Most concerning is the long term, which could see the DCEP take over as the primary financial system for underserved people around the world. According to the World Bank, about 1.7 billion adults do not have a bank account, although two-thirds of them have a mobile phone. Many of these people are in places targeted by China’s Belt and Road Initiative. For example, more than 60 percent of Indonesians do not have a bank account, but the nation has more cellphones than people.
With the DCEP, these people would have access to a secure and free banking alternative, allowing them to participate in online commerce and accrue savings. If other actors fail to offer an alternative, the digital yuan could find a foothold across the Belt and Road.
If the DCEP is widely adopted, the CCP would have control over the finances of nearly half the globe. Other nations have shown an interest in creating their own digital currencies, including a consortium with the Bank for International Settlements, but China is clearly vying for the lead.
If other countries drag their feet, and continue to ignore the digital transformation and underserved people, the consequences could be seismic.
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