China’s digital sovereign currency tests put it ahead of the global pack in push to adopt digital money

People’s Bank of China started studying digital currency in 2014, but the pace picked up last year after Facebook omitted the yuan from a basket of currencies in its Libra project

European Central Bank warns of foreign providers taking the lead in digital currencies, while starting to examine the pros and cons of its own unit

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China’s plans to launch a digital sovereign currency are being driven by Beijing’s ambition to prepare for what may become of the international monetary system in the future. Photo: Shutterstock

Published: 8:00pm, 14 Sep 2020Updated: 9:02pm, 14 Sep 2020

China’s central bank is moving closer to a full roll-out of its sovereign digital currency, with tests having already been conducted in pilot cities, though the formal launch date for the nation’s new digital money remains unknown.

Meanwhile, other major central banks are warming to the idea of digital currency, with the European Central Bank saying last week that it would begin exploring the pros and cons of pursuing its own. Sweden’s Riksbank has also been testing its e-krona for months.

But China is well ahead, having been testing its digital currency for most of the last year.

China’s Digital Currency Electronic Payment (DCEP) system is being tested in the economically significant cities of Suzhou, Chengdu, Xiongan and Shenzhen, as well as at future Winter Olympics venues, with an expanding list of participants.

Beijing’s enthusiasm for a sovereign digital currency was originally prompted by the rapid digitisation of the country’s commercial transactions – led by Ant Financial’s Alipay and Tencent’s WeChat Pay mobile apps – and the extraordinary rise of cryptocurrencies such as bitcoin. However, it is increasingly being driven by Beijing’s ambition to prepare for what may become the future of the international monetary system, amid decoupling threats and potential financial sanctions from the United States, according to analysts.

“Digital currencies have become a strategic height that major powers must reach to consolidate their lead in the global monetary area,” Liu Yushu, a researcher with the Beijing-based Chongyang Institute for Financial Studies, wrote in an article published by the state-run Financial News last week. “Our lead in digital currency research would mean pre-emptive opportunities in international markets, and it could also facilitate regional cooperation.”

China’s central bank, the People’s Bank of China (PBOC), started researching a sovereign digital currency as early as 2014 and established an institute in 2017 to study it in depth. The PBOC’s work was largely unknown to the public until Facebook unveiled its Libra project in May 2019 to create a new digital currency backed by a basket of existing currencies, led by the US dollar. Because the Chinese yuan was not in the currency basket proposed for Libra, the Facebook project was seen in Beijing as enhancing the existing US dollar hegemony.

The subsequently disclosed details of the DCEP indicated a two-tier structure with central bank control – the PBOC would issue the money to commercial banks, which would then provide it to individuals through their e-wallet accounts. While the exact technical approach and privacy settings remain unclear, it is mainly designed to replace cash in retail transactions.