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Asking OKEx CEO: 10 Questions About China’s DCEP

2020.04.16 Kelvin

Screenshots of the test interface of China’s much-anticipated DCEP (Digital Currency Electronic Payment) is a bomb to the finance, blockchain, and crypto spaces. The revelation of the interface hints that DCEP is likely at the final stage of development and rumor has it that The People's Bank of China (PBOC) is preparing to launch pilots of the digital yuan in four cities including Xiong'An, Suzhou, Chengdu, and Shenzhen.

With much hype and interest, we have talked to OKEx’s CEO Jay Hao and asked him ten commonly asked questions about DCEP.

Test interface of DCEP

Q1. What is DCEP and how is it different from the existing Chinese yuan?

Jay: Simply put, DCEP is the Chinese yuan banknotes and coins we use every day digitalized.

Q2. Are DCEP and Bitcoin similar things?

Jay: No, they are entirely different things with two distinctive differences:

First, DCEP is 100% state-backed by the government’s reserve fund. In other words, it is central bank’s debts guaranteed by PBOC. So, it is a national sovereign currency. On the other hand, Bitcoin is not backed by any central banks. That’s why there is the huge price fluctuation in its value.

In terms of design, DCEP adopts a two-layered operating system - the PBOC first converts DCEP to banks or other financial institutions, and then these institutions further distribute the digital currency to the public. Bitcoin is issued in a decentralized way called mining, which does not involve any central banks or commercial banks, and it is distributed to the public directly.

Q3. Is DCEP just another stablecoin like Libra and USDT?

Jay: No, DCEP is backed and issued by the Chinese government, while Libra and USDT are issued by private institutions and collateralized by the US dollar or other fiat currencies.

From a legal perspective, DCEP is a legal tender, which means when we use DCEP for payment, merchants cannot refuse. On the contrary, Libra and USDT are not legal tender and merchants have every right to say no if we want to pay with them.

Q4. Is blockchain technology applied to DCEP?

Jay: It is hard for PBOC to fully apply blockchain technology to DCEP as the existing technology can’t handle the high concurrency that will take place. As far as I am aware, DCEP has borrowed some of the concepts in blockchain technology, as blockchain itself is actually a smart combination of many existing mature technologies, such as asymmetric cryptography, proof-of-work, and timestamping. As seen from its latest disclosed patent, DCEP is integrated with asymmetric cryptography, unspent transaction output (UTXO), and smart contract technologies. However, consensus mechanism, which is the key of public blockchains, is unlikely to be adopted.

Q5. What is the difference between DCEP and the balances in Alipay / WeChat Pay?

Jay: Alipay and WeChat Pay are the most popular mobile payment apps in China. However, DCEP is more than just another virtual wallet balance.

In terms of money supply, DCEP is designed to replace the current Reserve Money (M0), which is cash, while the funds stored in Alipay and WeChat Pay belong to M2, the deposits of non-depository financial institutions. This is to say, DCEP is the new cash.

Besides, the legal status and security level of the central bank digital currency is much higher than the Alipay and WeChat Pay balances. Similar to commercial banks, when these third-party payment companies go bankrupt one day, people have to face the risks of losing their funds. But DCEP holders will never have to deal with this problem.

Q6. What are the advantages of DCEP?

Jay: DCEP comes with a host of advantages.

Firstly, it offers a solution to the high cost of issuing, withdrawing, and storing banknotes, as well as the inconvenience in carrying and using cash.

Secondly, the problem with the current central bank's monetary policy making is that it is impossible to monitor the circulation and use of the currency after it is put into use. With DCEP, the collection of transaction data and circulation information is made much easier, providing an excellent reference for formulating and implementing future monetary policies.

Thirdly, DCEP facilitates the work of anti-money laundering, anti-tax evasion, anti-corruption, and anti-terrorist financing. Based on the information released by the PBOC, although the digital currency adopts controllable anonymity, the PBOC can still use big data and other technologies to identify suspicious transactions and conduct anti-money laundering and anti-terrorist financing supervision.

What’s more, DCEP can foster the development of China’s digital economy. For example, DCEP can generate massive big data that may promote the development of China's credit industry, resulting in reduced bad debt rate and risks faced by financial institutions.

Last but not least, it improves the quality of financial services in underdeveloped and remote areas. At present, people in those areas are still unable to enjoy handy financial services, such as money transfer, deposit, and loans. However, DCEP can be a game-changer.

Q7. Does PBOC’s introduction of DCEP mean China is moving towards a cashless society?

Jay: Generally speaking, a cashless society can function without any physical currency. The US has started to use credit cards since the 20th century. Fast forward to a decade ago, third-party mobile payment apps emerged in China. They are, in fact, cashless transaction systems. The world has started to move towards a cashless society earlier than we may have thought.

Speaking of money supply, cash is classified into M0, and credit cards and Yuebao belong to M1 and M2 respectively. And as I mentioned above, DCEP is classified as M0. Therefore, China is truly going cashless. However, going cashless takes time - It may take decades or even a century to achieve so.

Q8. How can DCEP benefit the internationalization of Chinese yuan?

Jay: The digitization of Chinese yuan does. simplify cross-border payments and transactions and enhance the overseas circulation of the currency. However, it isn’t the sole factor contributing to the internationalization of yuan.

Facilitating offshore circulation is only part of theinternationalization plan. The ultimate goal of yuan is to become the world’s leading reserve currency and trade settlement currency. Particularly, yuan-denominated assets have to become a major foreign exchange reserve of central banks, and yuan-settled transactions must account for a certain proportion in international trades. The digitization of yuan is far from achieving any one of these.

Q9. How will DCEP change the payment habits of the Chinese population?

Jay: In fact, DCEP works in the same way as Alipay, WeChat Pay or other third-party payment services. But DCEP can, to a certain extent, smash barriers in the payment industry. For example, while we can’t transfer money from Alipay to WeChat directly and vice versa, DCEP can be deposited to both bank accounts as well as Alipay and WeChat wallets.

Q10. Will DCEP completely replace cash?

Jay: It is too early to say so. Yet, without a shadow of a doubt, DCEP will facilitate the monetary policy making of the Chinese government. The money in your pocket is still yours, but its circulation will be much more efficient across the country and even the globe.

PBOC is developing a “double offline payment” technology that allows transactions to be completed even when both sides of a transaction are offline. Such technology will doubtlessly make DCEP highly usable in most occasions and attract people to adopt it for the ease of use.

Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.

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