PBOC moves closer to the launch of DC/EP, its own digital currency

The Chinese monetary authority has identified digital currency as one of the nation's most important infrastructure areas in the coming years, and the global community is expecting the birth of a digitalized renminbi this year.

Senior officials from the People's Bank of China, the central bank, said recently that the testing of the central bank's "digital currency and electronic payment," the so-called DC/EP, had already finished.

According to a speech made by Fan Yifei, vice-governor of the PBOC, there are some experimental areas for the DC/EP pilot program, for further testing the application scenarios and service scale, and the functions of the digital sovereign currency still need to be improved.

Although few new details have been disclosed, some basic ideas of the DC/EP design and issuance structure have not changed from the initial version.

Who will issue the digital RMB?

The PBOC will be the only legal body to issue the digital RMB, not directly to customers, but to institutions including retail banks. Then the institutions will distribute the digital currency to users, much as physical currency is issued now. Some technology and nongovernment companies may also join the distributing group.

In order not to disturb monetary policy and macro-prudential management, the central bank digital currency has adopted a "double-layer" mechanism, which does not change commercial banks' operation system as "credit intermediaries," said Qian Xuening, an economist with the Institute of Economics, which is part of the Chinese Academy of Social Sciences.

Will the digital RMB change the existing monetary system?

The upcoming digital RMB will only replace cash in circulation, or the M0. It will not disrupt the money supply system and the monetary policy transmission mechanism, which also include deposits held in bank accounts.

The design of the central bank's digital currency has not yet involved other parts of money supply besides M0, so it will not have a great impact on the monetary transmission mechanism, said Qian.

Will it be fully anonymous?

As a digital currency, transaction information about DC/EP can be recorded and tracked. If the central bank has the right to check the information it will pose a threat to privacy. But a fully anonymous digital currency may encourage illicit transactions, such as terrorist financing and money laundering. So the digital RMB will be "controllable anonymously," creating a balance between privacy protection and preventing crimes, according to Mu Changchun, head of the PBOC digital currency research institution.

When will it be launched?

The PBOC started research into digital currency in 2014. In 2016, it opened the Institute of Digital Currency and established a special work team in 2017 for experimenting with the central bank-backed DC/EP.

After five years, the research and testing processes are almost finished, and the PBOC will "steadily promote the launch and application" of digital RMB, said central bank officials.

What are the advantages of digital currency?

At present, the world's major sovereign digital currency models include the "Rscoin" generated in the United Kingdom, and China's DC/EP. The original idea of both models is to replace and develop the existing paper currency and electronic accounts, in order to enhance monetary stability, improve financial efficiency and monetary policy functions, said Qian with the CASS.

To replace paper money, the digital currency can record information of real-time transactions, including criminal transactions and money laundering.

"After the complete substitution of paper money, the central bank can implement a subzero interest rate through the digital system, so that the monetary policy can break through the zero interest rate limit," Qian added.