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China, the first country in the world to roll out its digital currency

Inspired by Bitcoin that was invented in 2008, central banks around the world have been working on the development of their own digital currencies (Central Bank Digital Currency or CBDC, also called digital fiat currency or digital base money).

CBDC, which by definition does not have any physical format, is a revolutionary concept that could ultimately replace fiat money (or paper money) which appeared centuries ago. CBDC is different from virtual currencies and cryptocurrencies that are not issued by central banks. Cryptocurrencies use blockchain technology, they lack legal tender status and they are finite in nature (e.g. there will never be more than 21 million bitcoins, rain or shine). CBDCs are the opposite of cryptocurrencies in these respects as they remain under the tight control of central banks which can issue as many as they want. From that perspective CBDCs do not offer any hedge against inflation risk or devaluation risk, as opposed to cryptocurrencies. Paying through CBDCs is not anonymous either, contrary to cryptocurrencies that have become the preferred method of payment of arms and drug dealers doing business on the dark web. Still at a development stage, 8 central banks out of 10 are known to be working on their own CBDC.

China invented paper money, the current format of fiat money, as early as in the 7th century. Coincidence or not, China is again ahead of all other countries as it became the first one to introduce its sovereign digital currency, i.e. a digital Yuan which is referred to as the Digital Currency Electronic Payment (DCEP).

China had already been the first country in the world to widely adopt mobile digital payment systems. These systems were developed by internet giants Alibaba with Alipay and Tencent with TenPay. With explosive growth starting from 2013, these two payment systems have trained more than a billion consumers on how to use their mobile phones for daily payments.  TenPay and Alipay have replaced coins, notes and credit cards in China to the point that many shops, street vendors and taxi drivers no longer accept cash. First time visitors to China are always fascinated by the fact that anyone can live his or her daily life without carrying anything other than a mobile phone.

DCEP will soon be another app on their mobile phones. One difference from the consumer’s perspective between the digital Yuan and TenPay/Alipay is that it uses Near Field Communication technology as opposed to QR codes. It does not require online connectivity to complete a transaction, bringing more convenience to consumers and shopkeepers.

China’s central bank, People’s Bank of China (PBoC) started its research on digital Yuan as early as 2014. In recent months activity picked up as it completed the infrastructure needed for DCEP. It carried out live tests in September in Shenzhen, Suzhou, Xiong-An, and Chengdu and it is now rolling it out on major e-commerce platforms throughout the country. JD.com became last week the first e-commerce platform to adopt this new payment system. The Chinese government plans to use the 2022 Winter Olympic Games in Beijing to showcase the technology to an international audience.

Since China already revolutionised digital payments with TenPay and Alipay, one could wonder why it needs a digital Yuan. The answer is three-fold:

Even though the digital Yuan is directly managed by PBoC, it needs commercial banks to act as distributors and payment intermediaries. Both commercial banks and PBoC are requested to keep databases that track the flows of digital Yuan from user to user. We understand that for the time being there is no plan to replace M0 (notes and coins), but one can easily imagine that this could happen in a not-so-distant future. The advantage for PBoC and for the Chinese government would be to always know how much cash anyone has and details of all transactions.

The second advantage would be to break the duopoly of Tencent and Ant Group, the two companies that control TenPay and Alipay. It was only a few weeks ago that the IPO of Ant Group got derailed by the Chinese government because of the systemic risk Ant Group was representing due to its size, to its open ambitions and to a lack of regulations to supervise it. Since then we have seen the Chinese government taking actions against monopolies in the internet and e-commerce space, triggering a de-rating of the entire sector. The Chinese government is not interested in replacing TenPay and Alipay that have become ubiquitous, but we believe it has a vested interest in competing with them by introducing an alternative payment system.

The third advantage is to speed up the internationalisation of the Yuan. Once the Yuan is digitalised, merchants have downloaded the app and foreign banks have adopted the platform, it would become as easy to pay for an ice-cream at the Eiffel Tower in Yuan with a mobile phone as it is in Euro with coins.

These motivations are certainly very different from those of other central banks around the world that are currently developing their own digital currencies. For them, holding notes and coins in wallets is just a costly, cumbersome and antiquated mode of holding cash in this day and age.

The information contained herein is issued by JK Capital Management Limited. To the best of its knowledge and belief, JK Capital Management Limited considers the information contained herein is accurate as at the date of publication. However, no warranty is given on the accuracy, adequacy or completeness of the information. Neither JK Capital Management Limited, nor its affiliates, directors and employees assumes any liabilities (including any third party liability) in respect of any errors or omissions on this report. Under no circumstances should this information or any part of it be copied, reproduced or redistributed.

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