As Global Risks Rise, China Moves Forward With National Digital Currency 

Right now, most of the world is busy rebuilding and recovering from the coronavirus pandemic. All the while, and perhaps somewhat under the radar, China has been making swift progress with the adoption of its Digital Currency Electronic Payments (DCEP), a national cryptocurrency being developed using blockchain technology. The digital currency is to be issued by the PBoC, the country's central bank.

According to BoxMining, the point of the effort "is to increase the circulation of the RMB and [its] international reach—with eventual hopes that the RMB will [become] a global currency like the US dollar." Though Chinese courts recently ruled that some high-profile cryptocurrencies such as Bitcoin and Ethereum are legal and protected by law, authorities have this week been cracking down on what they deem to be illicit activities using digital currencies, with a particular focus on Tether.

Since June 4, about 4,000 bank accounts belonging to over-the-counter crypto traders in the country's Guangdong province have been frozen on suspicion of such illegal activities as money laundering. Which may provide additional insight into why this move by the People's Bank of China could be occurring now.

Changing Stance On Cryptocurrencies?

Josh Tate, CEO of ForumPay points out that years ago the People's Bank of China came down hard on Bitcoin crypto mining. Could it be that with the launch of its own digital coin it's possible the country is adjusting its stance on digital currencies?

Tate is skeptical. He doesn't believe the DCEP digital yuan is a sign that Beijing has changed its tune on cryptocurrencies as a whole. He adds:

“After all, China banned Bitcoin in 2013, closed down its crypto exchanges in 2014 and in 2017 demanded the shutdown of Initial Coin Offerings (ICOs). In recent years China has invested heavily in digital infrastructure to keep tabs on its citizenry. Therefore, the country’s crypto launch could also be seen as yet another measure to expand China’s ability to monitor its people."

Others see a different strategy developing. Amit Ghosh, head of Asia-Pacific at R3, a blockchain technology company, says the development of Central Bank Digital Currencies (CBDCs) has become an increasingly competitive space in recent years, with the possible launch of a digital renminbi serving as a primary focus for global media and political attention when it comes to state-backed digital currencies.

He adds that, on an international level, a digital renminbi could see China’s influence in the global trading arena become more prominent, especially with emerging market, cash-based economies.

There has also been discussion centered around DCEP’s ability to challenge the U.S. dollar’s dominance within the global economy, something China has been targeting for years, most notably in 2018 when it began offering oil futures denominated in yuan.

Disrupting Exisiting Payment Models

Others believe China's digital currency will be a financial market game changer, by disrupting existing payments models while increasing competition in the space. Kenneth Bok, head of growth and strategy at blockchain firm Zilliqa, notes that, given the existing reliance in China on commercial electronic payment systems such as Alibaba-owned AliPay (NYSE:BABA) and Tencent-developed WeChat Pay (OTC:TCEHY), the DCEP is designed to provide an alternative vehicle for reducing the duopoly of these platforms. At least that's how Mu Changchun, the director-general of the PBOC's Institute of Digital Currency explained it.

According to Bok, it's estimated that 96% of the country’s population uses those currency platforms for digital payments. Given the planned scale for the DCEP, it’s likely to become the largest retail, central bank digital currency project ever undertaken up until now. Says Bok:

“As a model for countries looking to follow suit with their own CBDC initiatives, the transformative effect of DCEP could be significant, amplifying the benefits of increased efficiency, cost reductions, and a new approach to policy making, driven by additional monetary and fiscal insight.”

Lennard Neo, head of research, at Stack Funds in Asia believes the timing could not be better given the build-up of geopolitical risks the Chinese state has been involved in during recent months, including its position as ground zero for the coronavirus pandemic, simmering Sino-US trade tensions, expansionism via the Asian nation's Belt and Road Initiative and increased disciplinary actions in Hong Kong. Plus, of course, controlling dark money activities.

“Central Bank Digital Currencies have been in the spotlight for quite a while now, and the main benefits aside from convenience are to curb issues such as shadow banking, and engender greater transparency for national currencies. However, the full extent of the implications which CBDCs could have for the traditional economy and for regular consumers remains unknown.”

For all his doubts, ForumPays Tate also sees a positive to the country's adoption of a national cryptocurrency.

“China’s decision to launch a cryptocurrency of its own may encourage the Western world to look carefully at the many opportunities in and around crypto. It will be fascinating to see if e-commerce giants become ambassadors for the digital yuan."

Should something like this occur, it would open doors for other major cryptocurrencies to compete, enhancing crypto’s fungibility. If Alibaba and its Taobao shopping website embrace crypto transactions, it's likely other global e-commerce players will join the competition, adds Tate. China isn't the only country whose central bank is working on CBDCs analogous to the digital renminbi, for example, Sweden’s Riksbank is developing and testing an e-krona.

There's yet one more reason why Beijing may be eager for this development now. Otherwise sanctioned jurisdictions will then be able to trade freely with China.

Some suspect the launch of such a digital currency could also allow Iran and other rogue states to more easily evade U.S. sanctions or move money without being caught. Recently, the Middle Eastern country shifted much of its international commerce to the new yuan-based system which allows Tehran to avoid dollar transactions, particularly on oil sales, and thus dodge U.S. financial institutions, Foreign Affairs reported.