Explainer | What is China’s sovereign digital currency?

What is China’s sovereign digital currency?

China’s version of a sovereign digital currency, the so-called Digital Currency Electronic Payment (DCEP), will be used to simulate everyday banking activities including payments, deposits and withdrawals from a digital wallet.

Once launched, consumers would download an electronic wallet application authorised by the People’s Bank of China (PBOC), which they would then link to a bank card to start to pay with or receive digital yuan using a mobile phone with merchants or make transfers with an ATM machine and other users.

The money from the linked bank account would be converted into digital cash on a one-to-one basis. There is also an option that does not require a bank account to hold and conduct transactions in the digital yuan.

Unlike other online payment platforms that are already commonly used in China, including Alibaba’s Alipay and Tencent’s WeChat Pay, the DCEP system supports payment transactions even without an internet connection. The function called “touch and touch” allows two users to simply touch their mobile devices together to make a transfer, leaving no payment record with a third party or the banking system.

The digital yuan is part of the most liquid form of money supply that includes notes and coins in circulation in the society, known as M0, but in a digital form. It is issued and backed by the country’s central bank.

Why does China want to have its own digital currency?

“Looking back years later, the two defining historic events of 2020 would be the coronavirus pandemic, and the other would be [China’s] digital currency,” said Xu Yuan, a senior researcher with Peking University's Digital Finance Research Cen­tre.