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The Hindu Explains | How does China’s digital currency work?

How is legal tender issued by the central bank different from payments guaranteed by a third-party operator?

The story so far: China in February launched the latest round of pilot trials of its new digital currency, with reported plans of a major roll-out by the end of the year and ahead of the Winter Olympics in Beijing in February 2022. While several countries have been experimenting with digital currencies, China’s recent trials in several cities have placed it ahead of the curve and offered a look into how a central bank-issued digital tender may impact the world of digital payments.

How does China’s digital currency work?

Officially titled the Digital Currency Electronic Payment (DCEP), the digital RMB (or Renminbi, China’s currency) is, as its name suggests, a digital version of China’s currency. It can be downloaded and exchanged via an application authorised by the People’s Bank of China (PBOC), China’s central bank. China is among a small group of countries that have begun pilot trials; others include Sweden, South Korea and Thailand.

How is it different from an e-wallet?

Unlike an e-wallet such as Paytm in India, or Alipay or WeChat Pay, which are the two dominant apps in China, the Digital RMB does not involve a third party. For users, the experience may broadly feel the same. But from a “legal perspective”, points out Santosh Pai, an Honorary Fellow at the Institute of Chinese Studies (ICS) in New Delhi and a corporate lawyer who researches Chinese regulations, the digital currency is “very, very different”. This is legal tender guaranteed by the central bank, not a payment guaranteed by a third-party operator. There is no third-party transaction, and hence, no transaction fee.

Unlike e-wallets, the digital currency does not require Internet connectivity. The payment is made through Near-field Communication (NFC) technology. Also, unlike non-bank payment platforms that require users to link bank accounts, this can be opened with a personal identification number, Dong Ximiao, a think-tank researcher with the Asian Financial Cooperation Association, told Chinese media, which means “China’s unbanked population could potentially benefit”.

How widely is it being used in China?

Following trials launched last year shortly after the COVID-19 pandemic struck, 4 million transactions worth $300 million had used the Digital RMB, the PBOC said in November. In the latest round of trials in February to coincide with the Chinese New Year holiday, Beijing distributed around $1.5 million of the currency to residents via a lottery, with “virtual red envelopes” worth 200 RMB each (around $30) sent to each resident.

Shenzhen and Suzhou were other cities that distributed currency as part of pilot trials, which the Ministry of Commerce said will be expanded in coming months, with a wider roll-out expected before the Winter Olympics.

What are the reasons behind the push?

The trials coincided with moves by Chinese regulators to tame some of its Internet giants, including Alibaba, which is behind Alipay, and Tencent, which owns WeChat Pay. “While digital payment platforms have helped to facilitate commerce in China, they have placed much of the country’s money into the hands of a few technology companies,” said a recent report from the Center for Strategic and International Studies (CSIS). “In the fourth quarter of 2019, Alibaba controlled 55.1% of the market for mobile payments in China. Tencent controlled another 38.9%.”

A “key objective of China’s sovereign digital currency” was “to maintain financial stability should ‘something happen’ to Alipay and WeChat Pay,” Mu Changchun, the director-general of the PBOC’s digital currency institute, was quoted as saying by the South China Morning Post. Chinese regulators have also warily viewed the rise of cryptocurrencies.

The central bank-issued digital RMB will turn the logic of decentralised cryptocurrencies on its head, without the privacy and anonymity they offer, by giving regulators complete control over transactions. There are global motivations as well. “Beyond China’s borders, DCEP could help facilitate the internationalisation of the renminbi,” the CSIS report said.


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