As the largest market for mobile payments, China has recently published its working mechanism for its Digital Currency Electronic Payment (DCEP), endorsed by the People’s Bank of China (PBoC). The PBoC’s ambition to become the first central bank to launch its official digital currency suggests another Chinese milestone in realizing a cashless society.
Currently, Alipay and Wechat Pay, the country’s two largest mobile payment providers, account for 96% of the total online payment market. The introduction of DCEP is an attempt from China’s central bank to enhance the existing payment infrastructure.
According to Changchun Mu, director-general at the institute of digital currency of the PBoC, the objectives of the DCEP include safeguarding the currency sovereign, reducing the redundancy of current electronic payment instruments, and centralizing the whole payment infrastructure.
“In case there is something bad or a technical problem, we have to be prepared as a central bank.” says Mu at the Hong Kong Fintech Festival.
One distinctive feature of DCEP is financial inclusion. People in rural areas or foreign visitors without traditional banking accounts in China would be able to enjoy financial services by opening a digital wallet from PBoC. It is expected that mobile devices with network availability will be able to pay digitally and rural cities can also catch up with developed cities in terms of the penetration rate of mobile payment.
The rise of global digital currencies such as Facebook’s Libra poses a threat to the monetary policy of some central banks, especially those with capital controls. China is taking a proactive and cautious approach in launching a digital currency.
On one hand, PBoC has curbed all initial coin offerings and crypto exchanges in China. On the other hand, the central bank has actively exploring opportunities in launching its own cryptocurrencies. In 2014, the former central bank governor Xiaochuan Zhou first encouraged the launch of a central bank digital currency, while in 2017, the PBOC set up an institution in Shenzhen to study the subject.
The notice published by PBoC recently pointed out that there will be two layers in the DCEP mechanism. PBoC will issue the DCEP to commercial banks, which will then issue DCEP subsequently to the general public.
“During the research, issuance and exchange period, there is a horse-racing approach. The front runners will take the whole market. So whoever is more efficient and can provider better services to the general public will survive in the future,” says Mu.
The PBoC has mandated Alibaba, Tencent and China's big four banks to participate in this pilot DCEP project as joint underwriters. Although it has not been announced which city will pioneer China’s central bank digital currency, it is believed that large cities such as Beijing, Shanghai and Shenzhen would serve as pilot cities.
In terms of the underlying technology, Mu says that distributed ledger technology is not a preferred tool for DCEP due to its nature of disintermediation.
“We would like to avoid disintermediation and to substitute the existing M0 money supply. No interest will be paid and therefore there is no inflation implication,” says Mu.