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DC/EP Decoded

May 03-2020   



 

News that China’s Central Bank is testing its DC/EP (Digital Currency/Electronic Payment) in multiple locations has roused surmise and argument and greatly impacted on stock markets. Xu Yuan, Adjunct Professor of the NSD, recently spoke on some major issues of the DC/EP in a lecture for the PKU Digital Finance Open Class Series.

 

He believed the DC/EP won’t be of merely cosmetic value but of enormous significance. He first laid out the differences between the DC/EP and incumbent currency. The DC/EP is essentially a digitalized currency and as such its real-time transaction information flow and cash information flow will automatically enter a database system. And herein lies its first major impact: theoretically no any single transaction can hide from the eyes of the supervision authorities, and all currency-related behaviors such as issuing, transaction, payment and transmittance, among others, will become real-time and virtual.

 

Prof. Xu then expounded on the differences between the DC/EP and Wechat Pay and AliPay. Besides technological paths and legal effects, the EC/DP will replace M0 in the first step but hardly stop there, despite all official statements saying so thus far. He estimated that it will also have ramifications on M1 and M2. On another front of comparison, the DC/EP is believed to be starkly different from the Bitcoin in basis of credit and technology. Bitcoin is not a currency but a digital asset with its total volume capped and fixed.

 

Regarding the implementation of the DC/EP, Prof. Xu believed it will be rolled out gradually and in phases. Major commercial banks and telecom operators are reportedly involved in trials, affording a buffer zone for potential hitches. Competition among commercial banks will be encouraged, allowing the Central Bank to evaluate da variety of technologies and solutions.

 

Once in use, the DC/EP will usher in a cashless society. Smart phones will be requisite for its use; therefore some people will go cashless earlier than others. ATM machines can be expected to sharply decline in number. Besides, changes will happen to deposits and loans. The pool of current deposits might not disappear but will dwindle tremendously, and digital cash is likely to be linked to accounts for currency funds. Moreover, as people need not go to banks to deposit cash, commercial banks are obliged to focus on wealth management and loaning services. Those with powerful technology and database and good services will claim even more advantages while small and medium-sized ones will have tough days ahead. Furthermore, the DC/EP will have positive effects on the internationalization of RMB by skipping the need for physical bank branches abroad.

 

Prof. Xu also shared his views on more chain effects of the DC/EP, most importantly drastic improvement to informational structure and credit structure. Six years have elapsed since PBOC Governor Zhou Xiaochuan started to envision digital currency. Once rolled out, it will set a historic milestone with far-reaching impacts.

 

DC/EP Decoded

May 03-2020   



 

News that China’s Central Bank is testing its DC/EP (Digital Currency/Electronic Payment) in multiple locations has roused surmise and argument and greatly impacted on stock markets. Xu Yuan, Adjunct Professor of the NSD, recently spoke on some major issues of the DC/EP in a lecture for the PKU Digital Finance Open Class Series.

 

He believed the DC/EP won’t be of merely cosmetic value but of enormous significance. He first laid out the differences between the DC/EP and incumbent currency. The DC/EP is essentially a digitalized currency and as such its real-time transaction information flow and cash information flow will automatically enter a database system. And herein lies its first major impact: theoretically no any single transaction can hide from the eyes of the supervision authorities, and all currency-related behaviors such as issuing, transaction, payment and transmittance, among others, will become real-time and virtual.

 

Prof. Xu then expounded on the differences between the DC/EP and Wechat Pay and AliPay. Besides technological paths and legal effects, the EC/DP will replace M0 in the first step but hardly stop there, despite all official statements saying so thus far. He estimated that it will also have ramifications on M1 and M2. On another front of comparison, the DC/EP is believed to be starkly different from the Bitcoin in basis of credit and technology. Bitcoin is not a currency but a digital asset with its total volume capped and fixed.

 

Regarding the implementation of the DC/EP, Prof. Xu believed it will be rolled out gradually and in phases. Major commercial banks and telecom operators are reportedly involved in trials, affording a buffer zone for potential hitches. Competition among commercial banks will be encouraged, allowing the Central Bank to evaluate da variety of technologies and solutions.

 

Once in use, the DC/EP will usher in a cashless society. Smart phones will be requisite for its use; therefore some people will go cashless earlier than others. ATM machines can be expected to sharply decline in number. Besides, changes will happen to deposits and loans. The pool of current deposits might not disappear but will dwindle tremendously, and digital cash is likely to be linked to accounts for currency funds. Moreover, as people need not go to banks to deposit cash, commercial banks are obliged to focus on wealth management and loaning services. Those with powerful technology and database and good services will claim even more advantages while small and medium-sized ones will have tough days ahead. Furthermore, the DC/EP will have positive effects on the internationalization of RMB by skipping the need for physical bank branches abroad.

 

Prof. Xu also shared his views on more chain effects of the DC/EP, most importantly drastic improvement to informational structure and credit structure. Six years have elapsed since PBOC Governor Zhou Xiaochuan started to envision digital currency. Once rolled out, it will set a historic milestone with far-reaching impacts.