DCEP: China’s New Digital currency and Insurtech implications

Anjie Law | By | Feb 2, 2021

Since antiquity, China had led the world with its adoption of cutting-edge currency

Today, there is an immense amount of interest surrounding China’s new digital yuan (“DCEP” – Digital Currency Electronic Payment).

However, China’s history of currency innovation goes back to ancient times. Unlike Roman coins, ancient Chinese coins are marked by a square hole in the middle, allowing the bearer to efficiently string large amounts together for ease of transport.

Promissory bank notes appeared a few hundred years after silk bolts were used, in Tang dynasty China. These promissory notes allowed merchants to conclude large transactions without needing to carry heavy loads of metal coins (Tiě qián, 贴钱) on their person. Another few hundred years later, real paper currency (Jiāo zi, 交子) appeared in Song dynasty China (although Chinese paper already existed when silk was used as payment, it was mostly for wrapping and it took some time for paper currency Jiāo zi to emerge).

China is starting a new chapter in its currency innovations

Fast forward to today: with the proliferation of Wechat Pay and Alipay during the 2010s, China has, more than a millennium after inventing paper bank notes, become the first major economy to transform into a cashless society. In this regard, China is already miles ahead of other developed markets.

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In line with its history of currency innovation, China is again writing a new chapter. However this time, there is one major difference. Past Chinese improvements on money were usually incremental. Paper and silk are lighter than copper, and digital wallets weigh no more than the smartphone they’re carried. That latter also bring some additional record-keeping features, like a basic receipt for the parties’ reference.

Unlike these incremental evolutions, the DCEP is a revolutionary advance in currency. Allowing near-instant foreign exchange settlement and built on blockchain, the DCEP is perfectly traceable and allows the People’s Bank of China (“PBOC“, Chinese Central Bank) and state owned banks to collect data not only on transactions between users (the parties, the date, and the amount exchanged, among other details) but also on each subsequent transaction using DCEP. There is immense potential for using this ledger data to fuel the growth of fintech in China.

To better understand this, imagine for a moment if every transaction for every US Dollar in circulation — for the lifetime of each dollar — were recorded by the Federal Reserve on a ledger. These dollars are stored and exchanged in digital wallets, each of which has an “address” (like a bank account number) tied to a person or company.

Whether in New York, Paris, or Shanghai, the Federal Reserve now knows the name, timestamp, and amount exchanged for every transaction completed in USD. Now imagine that the Federal Reserve makes this data available to tech giants, either to help detect crime, encourage innovation, or even to help the government raise money. Imagine also that they share this information with law enforcement to help them identify and catch criminals, and fight money laundering and tax evasion.

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Obviously, the Federal Reserve won’t be able to realize these scenarios for legal and political reasons. It is very limited in what it can do with a digital dollar. It would be illegal for it to sell user data without user consent and privacy concerns in the US would quickly lead to public backlash against sharing data with law enforcement programs. It should be noted that the US Federal Reserve is considering a Central Bank Digital Currency (CBDC), though this has yet to launch and its scope is set to be much narrower than in the scenarios described above.

The PBOC, on the other hand, is more than ready to push a digital currency to its fullest potential, from government departments to beyond China’s borders. As of January 2, 2020, the PBOC had already filed 84 patent applications for the DCEP, and the DCEP is scheduled to be in use in time for the 2022 Winter Olympics in Beijing. The plan is to first implement its use across government institutions, then large Chinese companies, and then finally to help forge a path along the new land, maritime, and “digital” silk roads as a settlement layer in the Belt and Road Initiative (“BRI“). Former PBOC Governor Zhou Xiaochuan recently spoke at length on the potential for the DCEP to transform cross-border trade.

There are plans to share DCEP data to fight crime. According to Yao Qian, founder of the PBOC’s Digital Currency Research Lab, the DCEP’s data will also be shared with law enforcement. Of course, as suggested in a report by the Bank of International Settlements, the benefits to law enforcement could be minimal because ordinary criminals will tend to avoid a fully traceable currency. That said, it could be used to great effect to fight white-collar crime and corruption. For example, after government treasuries convert all Yuan to the DCEP, their spending (and the spending of government contractors) could be tightly monitored. This may lead to much greater transparency in areas like government product procurement, construction, and other public tenders, which are particularly vulnerable to bad actors. Similarly, once large companies convert to DCEP, it follows that their staff payroll and a funds paid to suppliers will also be traceable.

See: China’s Quest to become a leading Global Technology Superpower by 2050

Moreover, there are already plans in place for the mass-commoditization of data in China, which may enable marketing DCEP data. This year, it was revealed that Shenzhen will establish a “data trading market” and “take the lead” in exploring new mechanisms for data property rights protection and utilisation (see 2020 Implementation Plan for the Pilot Comprehensive Reform of Building a Pilot Demonstration Zone of Socialism with Chinese Characteristics in Shenzhen). To be clear so far, there is no indication this this is intended to market DCEP data, but it does open very interesting opportunities should the government decide to do so.

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