Why DCEP means a lot for China?

DECP, which stands for digital currency, electronic payment, is quite popular now in China. As we all know, Alipay and Wechat have pretty dominated by Chinese digital market, nearly 83% of non-cash transactions were made through mobile payments in 2018 and these players counted for 94% of that. So why there’s still DCEP?


So what’s the DCEP? We can consider DCEP as a public alternative for mobile payments, and since it’s endorsed by country sovereignty, the merchants cannot reject the acceptance.


People tends to analyze problems from the standpoint of consumers, they’re questioning that what’s the innovation or benefit that DCEP brings, while this time, it’s more like a task that has to be done by governors or policy-makers.


For financial institutions

Firstly, it can significantly reduce the cost for banks in manaing cash. Previoulsy it shall involve much human labor to count coins and paper currency, to move money around and guard them. DCEP can definitely reform the old style.


Secondly, going digital means that the government will have direct access and more visibility over transaction data to make financial policy more efficiently. Thanks to Alipay and Wechat, even the street artisk will put a QR code sticker on his loudspeaker box. Data collection could enable PBOC(people’s bank of China) to do more analyses through big data and make more accurate decisions over monetary policies and to more effectively combat financial crimes. 


Thirdly, to respond to potential competition posed by Facebook’s Libra and other systemic stablecoins. I was told that DCEP shall be officialy released by 2022, I thought that Libra more or less speeds up the process. Libra has a potential addressable market of at least 2.7 billion users globally. With this size of users and Facebook’s global reach, the impact of Libra is very likely to go above sovereign. Even though we’re limited to access to Facebook in China, Libra obviously is the obstacle for DCEP to go global.


Lastly and importantly, DECP shows the ambition for RMB to replace USD in the future. It’s a bit complicated to talk about the international settlement here, you can just imagine that all the money flowed among countries are settled by an institution which is ruled by USA. The US dollars prevails as the dominant international trade currency with nearly 45% share of value, while RMB is No.5 with only 2% share of total value.

The reason why people choose one currency over the other is not because of tech advancement. Rather it is because the economy and the political system behind the currency and a country’s monetary policy, which is complex and dynamic. And it also depends on how liquid such currency is. China still has pretty strict foreign exchange control. At present, individuals are subject to $50,000 USD annual limit in terms of both inbound and outbound. For companies, in order to exchange RMB for foreign currencies, they need to provide a set of documentations to prove the transactions are not for investment purposes.


As we mentioned before, it’s a have-to-do task. DCEP shall improve it’s ability to settle large-scale transactions. Any system has to be able to accommodate 300,000 transactions per second (TPS) to accommodate the volume of large retail transactions in China. Wechat pay and Alipay can process way more TPS than what is required. (Like during 11-11)


In China, I know that the internet companies such as Didi, JD and Meituan all said they’re going to participate in the testing of the digital RMB. The scale of these companies basically means that at least distribution will be no problem.


The ultimate goal seems to be officially launching digital RMB (or to test digital RMB on a larger scale) and introducing cross-border settlements/payments during Winter Olympics in 2022. The next stage is to test the ability for foreigners to use digital RMB in China by using their foreign phone numbers and to test expanding the use of digital RMB beyond China for cross-border payments, both of which require coordination with central banks or payments supervisory authorities of foreign countries.

China is playing a more important role in the global issues, we don’t mean to prove anything, we will keep respecting different culture and make others benefited.

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