Discussions about China’s digital currency backed by the central bank are heating up.
On Aug. 14, China’s Ministry of Commerce released a statement, stating that the digital yuan pilot program would cover most Chinese cities and regions such as Beijing, Hebei Province, Guangdong Province, and midwest regions. However, the following day, state-owned media Xinhua clarified that at present, internal closed point test are still conducted in Shenzhen, Suzhou, Xiong’an new area, Chengdu and the future Winter Olympics scenarios, as announced in April.
While there is no official timetable for the sovereign digital currency, people still wonder what is digital currency and how it will affect their normal lives.
Therefore, we talked with Xi Junyang, a professor at Shanghai University of Finance and Economics, to give the public a glimpse of what the digital currency could be like.
Let’s have a look.
Q: What is digital currency?
A: It’s the currency with a new form developed with specific digital technology.
It is different from bank transfers or third-party payments that we are using, which means that this currency already exists and is paid through electronic transfers.
Q: What is the difference between digital currency and WeChat Pay and Alipay?
A: WeChat Pay and Alipay are third-party payment providers. People need to link their accounts with their bank cards. The initial paying source is the money in their bank accounts. Banks are still paying for people.
Digital currency is the money in our wallet. We don’t need the bank to help us transfer.
Q: Where can I exchange it? In what scenarios can it be used?
A: It is possible to withdraw it through the bank and return to the bank.
At present, the initial stage of digital currency issued by the central bank is to replace cash and replace the function of cash.
So how do people get digital currency? Maybe it can be attained through traditional banking, such as extracting one’s salary by digital currency, or going to the bank to extract digital currency and transferring it to people’s digital currency wallet.
In all scenarios where cash can be used, digital currency can be used. For example, payments between individuals, shopping in stores, and adding money to transportation cards.
Q: “As long as you and I have digital currency wallets in our mobile phones, we don’t even need the network. As long as the mobile phones have electricity, and our mobile phones touch each other, we can transfer the digital currency in one person’s digital wallet to another,” Mu Changchun, director of the Digital Currency Research Institute of the People’s Bank of China, once said.
What are your comments on this?
A: This is a vivid saying. “Mobile phone touch” is actually the transmission of data between mobile phones. For example, when Bluetooth or other devices that can be directly transmitted are turned on, then digital currency can be transmitted in this way, which is an offline transmission.
Q: How will the digital currency affect people’s daily lives?
A: It helps reduce the use of cash. The digital currency can be used by people without WeChat accounts and in the regions that don’t have access to the internet.
What’s more, since digital currency can be paid offline, people can get rid of their dependence on the network.
It also has good safety. Digital currency is a kind of cryptocurrency. People don’t need to worry about telephone fraud, bank card swiping, cash loss or theft. If other people steal their mobile phones, the cryptocurrency can’t be used because everyone’s identity is unique and they can’t use other people’s digital currency.
And it will make people more dependent on mobile phones
Q: This April, China started testing its government-backed digital currency in some regions before it is introduced to the public. At present, pilot programs have been launched in Shenzhen, Suzhou, Chengdu, as well as in the Xiongan New Area, Hebei Province.
Why were those cities chosen as the pilot regions?
A: The pilot regions should be representative. They should include a first-tier city (Shenzhen), a provincial capital city (Chengdu), and relatively general city (Suzhou), and a new district (Xiong’an).
What’s more, the city scale should be appropriate. Why not choose Shanghai? Its scale is too large and has a large population. If there are loopholes in the system, the impact will be too huge. However, the city scale should not be too small. So, a small county can not be selected as the problem won’t be found if pilot experiments are conducted in small regions.
Besides, economic activity is also an important factor. Transactions and payments in the city should reach a certain frequency, such as Suzhou, where the economy is active.
Q: The People’s Bank of China, the central bank, has been researching digital currency since 2014. Why has it spent so many years researching and developing digital currency?
A: Digital currency is a totally new thing, and the technology is also complex. The development of digital currency can have a variety of technologies, and each technology has its advantages and disadvantages. Moreover, there are many sections involved in the development of digital currency, such as to consider how the currency can be transferred to holders, how to return to the bank after using it, and how to deal with it after the retail store receives it. The reliability of each section should also be considered.
Therefore, digital currency has many things that we have never encountered before, all need to be solved one by one, so it needs a lot of time to research and develop.
Q: What are some challenges in the process of promoting digital currency?
A: The stability of the system is a challenge. Is it mature and reliable? Because digital currency will be incorporated throughout the whole system, the pilot programs check the stability and reliability of the system.
What’s more, the use of equipment. The use of hardware equipment is required for payment, such as the matching levels between mobile phones and digital currency and the hardware quality requirements of mobile phones.
The reliability and safety of the bank’s internal management system are also a challenge. A large number of digital currency activities will be closely related to the operation of the bank. If there is something wrong with a big banking system, and the digital currency can’t be taken out or stored, there will be some problems.
Some technical problems also exist . What if the mobile phone runs out of power and Bluetooth fails during use?
Q: Will China’s issuance of digital currency affect the global financial landscape?
A: It will have the global demonstration effect. China is developing and issuing digital currency while other countries are not. So other countries may also consider doing that. What’s more, now we have traditional currency, not official government-backed digital currency. So the development of digital currency will fundamentally change the composition of global currency.
The status of unofficial digital currency, such as Bitcoin and Ethereum, may decline. People may be reluctant to use them because the government-backed ones have come out.
Digital currency uses peer-to-peer networks and does not go through a financial institution, like a bank.
In the future, for cross-border payments with digital currency, digital RMB can be transferred from one person directly to another person, so there is no need to go through the bank. Ultimately, banks’ status as an international settlement institution will gradually decline.