China accelerates launch of its CBDC

China accelerates launch of its CBDC, testing infrastructure before adoption

China continues the development of its Digital Currency/Electronic Payment project: could the digital yuan replace the dollar in global markets?

The crisis due to COVID-19 has barely dampened China’s interest in becoming the first major economy to deploy a Central Bank Digital Currency. On the contrary, the development of its Digital Currency/Electronic Payment project seems to be accelerating.

In the Shenzhen region, for example, 100,000 citizens received 31 million digital yuan for free through a lottery this month, and residents can now use ATMs to convert digital yuan into cash.

Meanwhile, the Postal Savings Bank of China has developed physical wallet cards in which to store digital yuan, a useful tool for the older population who are often uncomfortable with Bitcoin Machine electronic currency. The government, which seems committed to covering all eventualities, has recently involved the payment platform Alipay in building systems for digital yuan in the Shanghai area as well.

Why the rush?

Kevin Desouza, professor of commerce, technology and strategy at Queensland University of Technology, explained to Cointelegraph:

„China is accelerating the development of its CBDC. Simply put, they see it as a crucial competitive advantage in the digital economy.“

Considering the nature of markets and governance in China, as well as its determination to gain ‚first mover‘ advantage in the CBDC race, „we can expect China to intensify this initiative from now on.“

Eswar Prasad, professor of economics at Cornell University and senior fellow at the Brookings Institution, told Cointelegraph:

„China has made significant progress in establishing and refining the design and conceptual frameworks for its CBDC. It has made the transition of banking money from physical to digital increasingly a reality.“

After full implementation, the digital yuan will be used as M0 currency, meaning cash in circulation as coins and notes, according to an official at the People’s Bank of China. Preparation has been thorough, with pilot tests in 2020 in four regions (Shenzhen, Suzhou, Xiong’an and Chengdu) and during the build-up to the Winter Olympics, while the roadmap for 2021 includes tests in five regions: Shanghai, Hainan, Changsha, Qingdao, Dalian and Xi’an. According to Beijing Review, there has been an emphasis on usability in these test areas.

A key sentence from the report states that „both handsets were offline.“ China’s digital yuan will not require an internet connection, a feature considered critical in a region where more remote areas have patchy or non-existent internet access.

Challenges on interoperability and privacy remain

However, China has not solved all the problems associated with CBDCs. „There are still important issues to be addressed in terms of scalability, interoperability and privacy in transactions for DC/EP users,“ Prasad clarified.

Yu Xiong, international dean of Surrey University and professor of business analysis at Surrey Business School, explained to Cointelegraph:

„There will still be some technical issues left before full implementation, but the main problems have already been addressed in the testing period.“

The issue of usability has in fact been largely resolved.

Chinese consumers are flexible when it comes to new payment methods, and the digital yuan wallet is expected to be similar to those already widely used in China on non-bank payment platforms such as Alipay or WeChat Pay, according to Xiong. Users will download wallets for the digital yuan on their smartphones in which to store the digital currency:

„All commercial and online communication platforms will follow, so infrastructure will not be an issue.“

Crucially, users will not need to open a bank account to get started: they will just need to provide a unique identification document, such as a driver’s licence or mobile phone number. The launch of the digital yuan will be an event of considerable social significance for China, Xiong suggested, as it could introduce many underprivileged people to the financial system and alleviate poverty.