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Is DCEP crypto? Industry experts discuss China’s nascent digital currency
Over the past few weeks, China’s much-awaited digital yuan — Digital Currency Electronic Payment (DCEP) — regained popularity in crypto and mainstream media as more news of its development surfaced. Since January, the topic has been covered by mainstream media including CNBC, Forbes and Wired.
The project, led by China's Central Bank, PBoC, reemerged on the industry’s radar on April 14, when a screenshot was published showing that DCEP was being tested in Suzhou, Chengdu, Xiongan and other regions. Even more recent news, from April 23, revealed that Starbucks and Mcdonalds are among the retail giants invited to participate in testing the digital currency in one region.
When media cover DCEP — or any Central Bank Digital Currency (CBDC), for that matter — there tends to be an assumption that a) the currency is blockchain-based and b) its existence is thus relevant to the crypto and blockchain industry.
We asked blockchain, tech and economics experts to take a closer look at DCEP, the technology behind it and what its existence means for the industry.
DCEP was first introduced to the public by Zhou Xiaochuan, the former governor of PBoC, at a press conference at the 13th National People's Congress on March 9, 2018. In January of this year, China’s central bank announced that the “top-level” design of its digital currency had been completed, adding "We will continue to steadily advance the development of legal digital currencies.” This month, it was revealed once again that China’s digital currency was proceeding as planned.
However, Chongqing Technology and Business University professor, Changyong Liu, who holds a PhD in the history of economic theory from Peking University, told OKEx that China's central bank has been working on a digital currency for many years. He explained the origins of DCEP’s development:
“In late 2013, bitcoin made its first foray into China. In 2014, China’s Central Bank set up a research institute dedicated to digital currencies and started to study how to deal with the impact of cryptocurrencies and improve the Chinese Yuan system with blockchain technology.
But from 2014 to 2018, DCEP progress has been slow, perhaps because the decentralized architecture of bitcoin or the blockchain is incompatible with the very nature of legal national currency as the renminbi (RMB).
The sudden acceleration of DCEP at the end of 2019 is directly attributable to Facebook's [...] preparations to launch Libra. Despite its claim to be ultra-sovereign and a service to global finance, Libra's founders, partnership members and anchor currencies have consciously rejected China.
This has left China's central bank feeling the pressure of urgent international competition in the area of digital currency.”
How is China’s DCEP relevant to the blockchain/crypto industry?
“DCEP does not necessarily use blockchain”
Prof. Liu also noted that the DCEP “experiment” has so far been a cautious one, adding:
“It is therefore difficult to judge whether its goal is to actively promote monetary reform adapted to the Internet economy or to passively protect the traditional banking system. Since DCEP is still essentially a central bank-dominated fiat currency, it cannot be decentralized.
Mu Changchun, director of the DCEP project, has already mentioned that DCEP does not necessarily use blockchain technology.
At present, DCEP is mainly a technical transformation of the mechanism for the issuance and circulation of RMB. DCEP does not fit into the global blockchain craze.”
When talking about whether DCEP is good for the blockchain industry, Prof. Liu stated:
“it is mainly a technical transformation, it does not change the nature of the RMB and related regulatory systems, therefore, DCEP will not bring much convenience to the current blockchain industry or cryptocurrency industry.
In short, we do not have an RMB to bitcoin gateway right now, and we will not have DCEP to bitcoin gateway in the near future. While DCEP does not necessarily use blockchain technology, it does use asymmetric cryptography, which is the fundamental reason for the efficiency and security of electronic payments that DCEP provides and is probably the most important connection between DCEP and the blockchain/crypto industry.”
DCEP is a centralized crypto
Prof. Liu insisted that DCEP will not have a substantial impact on decentralized cryptocurrency, arguing:
“DCEP itself is a cryptocurrency, but it is not a decentralized cryptocurrency — it is a centralized cryptocurrency.
However, DCEP does have a huge impact on centralized cryptocurrencies, because for a centralized cryptocurrency, the stronger the center, the greater the competitive advantage.
There are now a number of privately issued tokens in circulation. These tokens are centralized and have a much lower credibility than DCEP. In the past, these have had some advantages over the RMB, mainly through cryptography. That advantage was lost when RMB was also transformed using cryptography.”
DCEP’s programmable nature will make it important long term
Yan Meng, vice president of the Chinese Software Developer Network (CSDN), who focuses on token economic research for the country’s largest developer community, also believes that DCEP will not have a big impact on crypto in the short term. He stated:
“DCEP has only an imaginary impact on the crypto world in the short term, as the central bank will very probably strictly regulate the flows of the DCEP in the early days. Some people in the crypto world may leverage this opportunity to create hype, but since the central bank holds an unfriendly attitude to crypto, I don’t see any chance that DCEP would help crypto in any way.”
Meng also believes, however, that DCEP will change the crypto world in the long run:
“The design of DCEP preserves a programming functionality, which is called 'script', and the designers plan to make the digital currency programmable in the future. If some day the regulators open the programming functionality to the public, the crypto community could easily take advantage of it and integrate DCEP into a host of DApps, especially DeFi apps. Then a much broader range of people will be involved in the crypto economy.”
Like Meng, Ken Huang — co-founder of Metaverse DNA — also thinks DCEP’s impact will be significant because it can be programmed:
“Thanks to DCEP’s programmable nature, leveraging smart contracts, one can build applications on top of DCEP for various real world use cases such as government subsidy, charity donation tracking, trade finance, taxation, and cross board payment in the future. I see there will be gradual adoption for a few years and a sudden surge of use cases and wider adoptions in about 5 to 10 years time frame."
Huang believes that DCEP is relevant to blockchain from a technology perspective, stating: “the trial version of DCEP currently leverages key blockchain technologies such as Public-key cryptography, UTXO, Smart Contract, and Digital Wallet.”
“The immediate impact is mindshare”
Speaking on DCEP’s relevance to the crypto world, Shuyao Kong, a columnist focusing on the Chinese market at crypto media Decrypt, told OKEx that “the launch of DCEP, regardless of its architect, usage, or even purpose, is sending a signal to the world that blockchain can be utilized by a large entity, albeit centralized." She continued:
"I think it begs the question of what a blockchain network can do by stretching our imagination of how a nationally-fluid currency would look like; Just look at how DCEP is taking headlines. The immediate impact is mindshare.”
DCEP’s overall significance
Significance will be visible via iteration
On the potential impact of the government-issued digital currency, Decrypt’s Kong stated:
“I treat DCEP as just another software solution, which means that the significance can only be seen through rounds of iteration. From a short-term perspective, the significance might be rhetorical, but it might marginally improve the way how Chinese society functions and how people are governed.”
Like Libra, short-term impact is overestimated
On the project’s significance, Prof. Liu stated that “the importance of DCEP is exaggerated at present, because DCEP is only a technical transformation of the money issuance and circulation within the traditional banking system." He continued:
"Its current test and application are not directly oriented to the most important Internet payment enterprises (WeChat Pay/Alipay).
Current overestimates of the importance of DCEP are very similar to last year's Libra case: both underestimate the difficulty of change within the traditional economy and overestimate the power of blockchain technology and centralized institutions.
In the long run, I believe that just as Libra's greatest impact is to raise awareness of cryptocurrencies among central banks and the public, DCEP's greatest impact is to provoke competition among central banks around the world, the traditional monetary system must be changed passively in the competition.”
Impact for international clearing
Yin Cao, managing director of Digital Renaissance Foundation — who recently participated in a talk on DCEP moderated by OKEx’s Director of Financial Markets, Lennix Lai — told OKEx that DCEP is in fact significant already, arguing:
“DCEP has become China's national financial policy. From the center of the Communist Party and China Central Bank to local governments and state-owned commercial banks, preparations for DCEP are under way.
I presume externally DCEP can be used as a clearing infrastructure to replace the U.S. Dollar clearing in the area of One Belt One Road countries, thus establishing a RMB economic circle.
Internally, it can better implement various monetary policies, or even implement non-conventional negative interest rate policies, and this would provide valuable monetary policy space for dealing with more intense international financial and economic turbulence in the future.”
“Unlike previous national financial strategies, China's DCEP for the first time invites private companies such as Alibaba and Tencent to join and participate deeply, indicating that the Chinese government wants to be able to integrate the huge user base of China's very large Internet companies. These internet companies’ technology and efficient strategic implementation capacity can serve the national big picture. “
On this topic, Metaverse DNA’s Huang believes that DCEP is not the right approach for RMB internationalization and reducing the dominance of the USD-based SWIFT system. He noted that “the RMB Cross-Border Inter-Bank Payments System (CIPS) launched on October 8, 2015, but RMB only accounts for 3% of world reserve currency (US dollars exceeding 67%). DCEP as a reserve currency faces the same challenges as that of CIPS.”
Views and opinions expressed in this article are solely those of the cited speakers and do not necessarily represent the views of OKEx.
Comments from Changyong Liu and Yin Cao were translated from Chinese by the article's author, OKEx analyst, Yansong Liu.