DC/EP Leads the World

Sep 07-2020   

With a series of pilot tests, the PBOC’s digital currency (DC/EP) has made waves far and wide. The tests have been carried out, one after another, in Shenzhen, Suzhou, Xiong An New Area, Chengdu, and the future Winter Olympics venues. In an interview with CCTV.com, Prof. Huang Yiping, Deputy Dean of the NSD and Director of the Institute of Digital Finance at PKU, said that China leads the world in the R&D of digital currency.

The Bank for International Settlement revealed in January this year that 80% of central banks worldwide were looking into digital currency and 10% would make an issuance soon. Prof. Huang said that the PBOC set about researching and developing digital currency in 2014 and is thus one of the pioneering central banks. It completed the R&D phase last year and has since moved into testing in various locations. If fully rolled out within a few months’ time, the DC/EP will become the world’s first central bank-issued digital currency by a major country.

The DC/EP might make cross-border settlements and investment speedier, safer, and cheaper. Yet its use in international trade will still be subject to some constraints – first and foremost the RMB capital accounts are not fully opened. If the RMB cannot be bought and sold in the international market, then the problems it faces in internationalization won’t be solved by digitalization alone.

Out of the three major functions of a currency, namely payment, pricing and investment, the DC/EP is expected to focus on the first one. To mitigate short-term impacts on commercial banks and the whole financial eco-system, the PBOC has built in mechanisms such as dual-level issuance and no interest payment. It remains hard to see how financial consumers will choose between digital payment and digital currency. Though a historic move, the DC/EP has taken a rather conservative first step.