A Great Leap Forward: Will 2021 Be The Year For DCEP?

December 1, 2020

Here at INAA, we’ve been paying close attention to the major innovations that are currently underway in China surrounding digital currency electronic payment (DCEP) methods. 

Before you dive into this article, bring yourself up to speed with our two previous DCEP guides:

While China’s DCEP has yet to officially launch country-wide, the imminent emergence of the digital currency as part of a wider ongoing rollout of blockchain-powered networks are anticipated to bolster China’s global technological and economic ascent.

In fact, China’s long-term growth is expected to generate significant economic value enhancing the finance, healthcare and manufacturing industries and stimulating innovation. 

Could 2021 be the year for DCEP?

CBDC vs Cryptocurrency: What is a Central Bank Digital Currency?

A central bank digital currency (CBDC) is designed to use digital tokens and distributed ledger technology (DLT) to express a country's official currency. Unlike cryptocurrencies such as Bitcoin, CBDCs are centralised and regulated by a nation’s monetary authority.

CBDCs also vary from cryptocurrencies in that banks are the only institutions controlling and operating digital currency electronic payments as legal tender. Currently, there are several sovereign governments around the globe looking into the viability of creating and issuing CBDCs. 

No country has officially launched such a digital currency electronic payment method — but China’s ambition is to be the first.

The Current Market & Social Conditions Around Digital Currency Electronic Payments

Over the past few years, China has been gradually moving towards becoming a cashless society. With more than 80% of Chinese smartphone users using their mobile devices to pay for point-of-sale transactions on a daily basis, China holds the record for the highest mobile payment adoption rate anywhere in the world.

What are the Key Market Challenges Facing the Adoption of CBDCs like China’s DCEP?

  • Lack of Adoption. CBDC payment systems that aren’t competitive with existing payment instruments may suffer from a lack of adoption potentially impairing the credibility of a country’s central bank.
  • Immature Technology. New technologies, like DLT, aren’t as tried and tested as other financial alternatives.

Security Risks. As they’ve yet to be fully tested in the real world, digital currencies without robust security infrastructure could be at risk of theft, double-spending (spending the same money on separate occasions), counterfeiting or system-wide instability.

What Preparations are the Chinese Government Making to Implement DCEP?

The primary objective of DCEP is to create a substitute for cash. While the Chinese government has remained relatively quiet on the DCEP initiative, the PBoC has continued its development efforts on the digital currency electronic payment system in a bid to increase competitiveness with other major global economies like the United States and the EU.

Using their deep know-how in back-end infrastructure, powerful user interface and consumer application scenarios, China’s internet giants are working in collaboration with the PBoC to successfully build and develop the DCEP system.

While the rise of DCEP is expected to happen quickly, the Chinese government is not preparing to implement DCEP all at once. In the early stages, DCEP will work for smaller payments like meals, groceries and transport, then expand to larger value-added services like government subsidies or cross-border payments in time.

When Will China’s Digital Currency Launch?

Even though no specific timeline has been provided as of yet, it’s widely reported that the PBoC will soon roll out the world’s first digital currency. 

Speaking about DCEP in late November 2020, China’s President Xi Jinping told G20 meeting attendees that the group of the world’s largest developed economies should be open to CBDCs.

DCEP testing has already begun in four pilot cities throughout China. On top of that, China has planned for DCEP to feature at the 2022 Beijing Winter Olympics, with a widespread official launch most likely in 2023.

Will We See a Great Leap Forward for China’s Digital Currency in 2021?

The impacts of DCEP are expected to be long-term, challenging the fintech and electronic payment market by removing intermediaries and introducing digital wallets powered by DLT instead and replacing physical cash once and for all.

DCEP is anticipated to meet its long term targets as a result of being purposely designed with characteristics such as anonymity, offline payments, financial inclusion and ease of use. That said, successful adoption will require government support and regular promotion. 

If China’s digital currency stays on its current course of trajectory, DCEP would account for 15% of all consumption payments over the next decade. This would allow commercial banks to take back any lost ground from emerging fintech companies over the past few years.

A 2020 Goldman Sachs report (shared with CoinDesk) concluded that in the next 10 years DCEP will reach:

  • 1 billion addressable users
  • 1.6 trillion rmb (€191 billion) in issuance
  • 19 trillion rmb (€2.25 trillion) in annual Total Payment Value (TPV)

On top of that, COVID-19 has also accelerated the rise of CBDC as a sanitised substitute for physical cash and as a way for governments to pay direct subsidies to individuals. The pandemic has led some experts to predict that 2021 will be the year where we will see a strong emergence of digital currency electronic payments along with more citizens than ever having CBDCs in their wallets or within their businesses.

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