Is China Trying to Create a "Digital Currency" that Works the Same Way Paper Money Does?

A big thank you to a reader who pointed me to this blog article which suggests that the PBOC in China may be working on something related to "digital currency" that I have not seen anywhere else. I wanted to feature this article for readers here since it talks about a concept from a central bank different than anything else I have seen while looking for various ideas for monetary system reform. 

Below I have pasted in some key paragraphs from the article. It sounds as if the PBOC in China is actually trying to create a new digital from of the Yuan that people can use the same way they would a paper note (or like a ten dollar bill if this were in the US). The article explains why this is such a different concept. It could certainly push China towards a "cashless" society if you define "cash" as actual paper notes.

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from the article:  (I added bold and underline below for emphasis)

"When I wrote about this back in 2018, I said that I thought it was unlikely that the PBoC would allow anonymous peer-to-peer transfers, so I was very surprised to see a Reuters report [6th September 2019] quoting Mu Changchun, deputy director of the PBoC’s payments department, saying about the proposed Chinese digital currency that “its ability to be used without an internet connection would also allow transactions to continue in situations in which communications have broken down, such as an earthquake”.

This would seem to mean that the system will allow offline transactions, which means that value can be transferred from one phone to another via local interfaces such as NFC or Bluetooth. If so, this would be truly radical. I wondered if something was mistranslated in the Reuter’s piece so I went to the source speech (albeit via Google Translate!) and I discovered that this is in fact precisely what he said. Talking about the project, which is called the DC/EP (digital currency and electronic payment) tool, he said that it is functionally “exactly the same as paper money, but it is just a digital form” and went on to confirm that

DC/EP can realize value transfer without an account. In the specific scenario, as long as there is a DC/EP digital wallet on the mobile phone, no network is needed, and as long as the two mobile phones touch each other, the transfer function can be realized… “Even Libra can’t do this,” Mu Changchun said”.

Wow. That’s huge. Libra can’t do it, and never will be able to. To understand why, note that there are basically two ways to transfer value between devices and keep the system secure against double-spending. You can do it in hardware (ie, Mondex or the Bank of Canada’s Mintchip) or you can do it in software. If you do it in software you either need a central databse (eg DigiCash) or a decentralised alternative (eg, blockchain). But if you use either of these, you need to be online. I don’t see how to get the offline functionality without hardware security.

If you do have hardware security and can go offline, then we are back to the question of fungibility again. Here the PBoCs principle is both clear and very surprising.

Mu Changchun said that the public has the need for anonymous payment, but today’s payment tools are closely tied to the traditional bank account system, can not meet the consumer’s anonymous payment needs, and can not completely replace the cash payment. The central bank’s digital currency can solve these problems. It can maintain the attributes and main value characteristics of cash and meet the demands of portability and anonymity.

Wow. They are serious. He goes on to say DC/EP will work the same way as banknotes.

Commercial banks open accounts at the central bank, paying 100% of the total amount, and individuals and businesses open digital wallets through commercial banks or commercial organizations. DC/EP is still replaced by M0 and is legally compensated. For users, just download an app to register, you can use a digital wallet, and recharge cash withdrawals need to dock traditional bank accounts.

I wonder if this will bring interoperability? If DC/EP is really to work as banknotes do then the e-RMB in my bank app and my Alipay app and my WeChat app much be interoperable. I must be able to transfer value from my Alipay app to your WeChat app. If PBoC cracks that they will be on the way to one of the world’s most efficient electronic payment infrastructures.

There was a final part to the speech which I did not understand at all, so perhaps a Chinese correspondent more familiar with DC/EP can clarify the meaning. The speech covers “smart” “contract” by which I assume PBoC means apps that use the DC/EP to execute on the handset (since there is no blockchain), but this is my assumption.

Mu Changchun said on several occasions that the central bank’s digital currency can load smart contracts. However, if a smart contract that exceeds its monetary function is loaded, it will be degraded into a value-for-money ticket, reducing its usable level, which will adversely affect the internationalization of the RMB. Therefore, digital currencies will load smart contracts that favor the monetary function, but remain cautious about smart contracts that exceed the monetary function.

I am baffled by this, which I am sure reflects my ignorance of advanced electronic money technologies, but I don’t think that this deflects from my overall observation that if the PBoC goes ahead and launches a person-to-person offline capable CBDC then that will be not only a nail in the coffin of cash but an event as significant and momentous in monetary history as the paper notes of the Khan a millennium ago."

Please click here to read the full blog article

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My added comments: To be sure you find the source for the information quoted above (in brown bold type), here again is the link cited to the google translated speech  the article author Dave Birch quotes from.

It will be interesting to see what comes of this and readers should watch for any news out of China from the PBOC on this. As I read this article, it sounds as if the prospect of the Libra from Facebook has created a sense of urgency in China to move forward on this concept.

Added note: This recent Reuters article points out the Libra is also causing a sense of urgency to respond in some way in the EU as well. But exactly how to respond appears to be an unsettled issue at this time. 

Followup: CNBC - Most Americans Don't Use Mobile Payments

This is a followup to our recent articles here and here that discuss how and why most people in the US have not moved towards new payment applications for paying normal daily expenses. CNBC runs this article which again points out that most people are simply happy with the debit and credit card system available to them. Below are some excerpts and then some added comments.

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"Despite growing smartphone dependence, most Americans still aren’t using the devices to pay for things."

. . . . .

"It seems odd considering the ubiquity of iPhones and Androids in the United States. More than 81% of Americans own a smartphone, up from 35% just eight years ago, according to Pew Research Center. While experts say mobile payments in the U.S. will eventually close the gap, they see legacy financial systems, a lack of a need for other options, and rewards cards as major headwinds."

. . . . .

"But in the U.S., the credit and debit card system is well-established and works just fine for most people.

“A big driver of mobile adoption is just how big an improvement is it,” du Toit said. “When it comes to the U.S., there is a good enough solution there already.”

. . . . . 

"U.S. consumers aren’t lacking options when it comes to paying on their phones. There’s Apple Pay, Google Pay, Samsung Pay, PayPal, Venmo, Square Cash, Zelle and newcomers looking to disrupt that entire list. But in order to use these apps, merchants such as coffee shops and retail stores need the proper hardware.

“It’s not the consumer mobile experience — they’ve done a pretty good job,” said Peter Gordon, CEO of PRMPayments. “It’s acceptance, meaning the merchant has to sign up for it. It’s expensive.”

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My added comments: Here again we have a mainstream publication article saying essentially the same thing we have said here on this topic. But really, this is just an example of why ALL change tends to take place gradually. Unless there is some kind of major problem/crisis that causes people to abandon what they have been doing, people tend to stay with what has been working for them. 

This may even offer another reason why the US dollar has become so entrenched globally as the reserve currency of choice. Once anything gets established as the standard, it tends to stay in that position for a long time unless something unusual comes along to disrupt the status quo.

So far, at least in the US, most people are still quite content to use debit and credit card for payments that are denominated in US dollars issued by the Federal Reserve. Here, we just continue to monitor events to see if anything will come along to change that.