Central banks all over the world are planning their digital currencies. It looks like China wins the race with their digital currency DCEP. What is DCEP? How does it work, and can it cause problems for cryptocurrencies? Let’s find out! This article has DCEP explained. We’ll also discuss the possible impact on other currencies.
What is DCEP?
The acronym DCEP comes from Digital Currency Electronic Payment. This is a digital currency based on cryptography and blockchain technology. It is a cryptocurrency, or is it?
Some argue that you cannot use the word cryptocurrency to describe a digital currency like DCEP. This discussion heated a year ago when Facebook’s Libra was launched. The argument is that cryptocurrency has a distributed network and it cannot be controlled solely by one entity.
For now, we call DCEP a cryptocurrency, until better, official and widely used terms are available. DCEP is also a stablecoin. The value of each DCEP unit is backed 1:1 by the Chinese Renminbi (RMB), which is often called as yuan, which is the basic unit of the currency.
Tether is the best-known stablecoin in the cryptocurrency world. It is backed by the US dollar.
Below, you’ll find some pictures of DCEP wallet apps.
1) A DCEP wallet application from a test that included the Agricultural Bank of China was inadvertently published. It’s important as it’s the first time we’ve seen pictures of the working DCEP wallet application, which is rumored to have a targeted late 2020 release date. pic.twitter.com/fRyi6BEZSl
— Matthew Graham (@mattysino) April 15, 2020
Since the value of stablecoins remains stable by nature, DCEP won’t be traded like Bitcoin. Of course, the value of renminbi can change compared to the US dollar or Euro, but these (possible) changes are very small compared to Bitcoin’s volatility.
DCEP will be a reality soon. Testing will begin in four large cities: Shenzhen, Chengdu, Suzhou, and Xiongan.
When DCEP will be officially launched, it’ll become an official digital payment method in China (with Renminbi). This is quite a step because so far cryptocurrencies are tightly regulated. Many might still remember the year 2017 when China banned all crypto exchanges.
Cryptocurrencies are not accepted as payment methods in China. However, owning them is not illegal. It is quite difficult to buy Bitcoin in China with no exchanges allowed. Many foreign exchanges have also banned Chinese customers from their platform. The same goes for ICOs.
Despite all this, China embraces blockchain technology. We saw the news regarding this in October 2019, which caused a massive 42% run in the price of Bitcoin inside 24 hrs. This was a non-event, though. China’s attitude towards blockchain has been well known and they haven’t become positive towards Bitcoin or any other cryptocurrency. It was no surprise that this short-term price boost melted away.
DCEP explained – it’s part of a global race
The PBOC (People’s Bank of China) has studied and developed digital currencies for six years. All this is part of a global race, which reached new levels in 2019 due to Facebook’s Libra. China recognized as a threat to its visions and speeded up the launch of DCEP.
Even if DCEP will a Chinese currency, in the beginning, China has bigger ambitions for it. China has lots of influence in Africa and other Asian countries. It’ll try to expand its influence through DCEP.
In the big picture, China wants Renminbi to become the new world’s reserve currency. It’s not an easy task to replace the US dollar, which has held this status for decades. The first important step for China took place in 2016 when RMB was accepted as part of the IMF reserve currencies. DCEP is certainly another big step.
China is not alone in this race.
The image is from the Prasos Q4 quarterly report, which is a great piece of information and available for the public. As you can see, many central banks have studied digital currencies for long time. Some have already even launched them.
Venezuela’s Petro became the first government-backed and controlled cryptocurrency in 2018. Petro was launched on the NEM platform, but it seems that almost every central bank has its own platform in development.
Sweden is also a well-known country pushing for a cashless society. Sverige Riksbank released news of a pilot program in February 2020, where the Swedish eKrone will be field-tested. Sweden has studied the possibility of a digital krone for years.
There have been also speculations during the corona crisis regarding the Fed. See the video below for more information.
It could be possible, that a digital dollar will be born soon, and stimulus packages and different kinds of corona aids would be handed out in a digital format. This would also force people to adopt the currency to receive aid.
Why a new digital currency
CBDC is an acronym meaning Central Bank Digital Currency. Why do CBDCs even exist? In case you didn’t already know, about 90% percent of the most important fiat currencies are already in digital form. In other words, just a fraction of the currency we use is coins and notes.
This is a result of a global initiative, which has been going on for years now. We are heading towards a 100% cashless society. Why wouldn’t central banks just adopt Bitcoin, for example? The reason is simple: it’s all about control.
Bitcoin is a distributed currency with no centralized leader. The monetary policy of Bitcoin is very difficult (= practically impossible) to change. With CBDCs, banks and governments have built currencies that are 100% controlled by them. The rules are decided and changed (if necessary) by the central bankers.
There is also an increasing need to replace the SWIFT system. It is decades old and doesn’t meet the standards of modern, digital society. Cryptocurrencies are also programmable money with much higher transaction output.
When China’s DCEP will be launched, it’ll become part of the same monetary system as the Renminbi. This means that all payment operators (Alipay, WeChat, Apple Pay) are forced to accept DCEP payments.
There is already a social credit system in place in China. It is a social ranking system for the citizen. If you behave in a certain way or commit crimes, your credit score goes down. If it’s too low, you might be denied services and you can’t be able to purchase a plane ticket, as an example.
CDBCs make it even easier to control people. A person’s “DigiEuro Wallet” could be easily frozen and his payments could be blocked to certain services.
The future of digital currencies
Is DCEP a threat to Bitcoin, US dollar or other currencies? It’s difficult to see DCEP being a direct threat to Bitcoin and cryptocurrencies. First of all, it is a stablecoin, which will already put it to a certain category.
One thing is certain. The launch of DCEP will speed up similar projects all over the world. The Federal Reserve should be worried if China’s new currency starts to spread to Asian and Africa. What if China starts to demand payments in DCEP for its products?
We have already seen interesting news regarding Libra. The project will be scaled down significantly and it won’t be a threat to CBDCs after this. The timing is surely interesting.
”No longer is the group focused on making Libra the basis of a new global financial system where Facebook could essentially play the roles of a central bank and Wall Street.”
There is also a massive unbanked market in the background. This means people mostly in developing countries, who don’t have access to a bank account. Many estimates say the number of unbanked people is 2 billion.
Bitcoin and different other cryptocurrencies would be certainly an option for unbanked people. This is an area where DCEP and other CBDCs might be a threat to cryptocurrencies.
About two-third of the unbanked people have a mobile phone. This is why Alipay and WeChat are insanely popular in China. They are mobile apps providing an easy payment method everywhere. Alipay and WeChat have together about 1.7 billion customers in China. And now, DCEP will be implemented to these applications.
It’s likely that China will try have DCEP adoption among the unbanked people. This could also happen in African countries, where China has a lot of influence. DCEP will also support NFC transfers. This means you can transfer DCEP from a mobile phone to another even if they are not online. It would make DCEP a cash replacement as well.
It looks like China is winning the race for CBDCs. It is not the first country to launch a government-backed cryptocurrency, but it is the first of the major economies. It’d be surprising if the Fed and the ECB don’t follow suit.
Unfortunately, the development of CBDCs is nothing positive for an average consumer. It’d be also easy for governments to force adoption by giving student loans, unemployment benefits or UIB through their CBDC system.