New Digital Currency Tested by Agricultural Bank of China

Recently, we saw a leaked picture about a so-called e-wallet for the Chinese central bank digital currency, or CBDC (DCEP, the official version of CNYT) from the Agricultural Bank of China (ABC). The picture implies that the wallet supports the conversion of digital assets, and other features such as wallet management, transaction bookings, fund payments and receivals.

Sources close to the People’s Bank of China (PBOC) say that this leaked picture is true and is currently available only to people in the white list. It is currently being tested in 4 Chinese cities: Shenzhen, Xiong‘an, Chengdu and Suzhou. PBOC officials appear to be reticent about this rumor.

Last August, Forbes reported that China would soon launch its DCEP (Digital Currency Electronic Payments) after several months of testing, and would distribute its DCEP to seven financial institutions including Industrial and Commercial Bank of China, China Construction Bank, Bank of China, Agricultural Bank of China, China UnionPay, Tencent and Ant Financial Services. This is quite possible because the PBOC is concerned about the potential disintermediation effect of DCEP, and is still potentially reliant on the banks to distribute the DCEP.  There were also rumors also that the DCEP will be initially used for Suzhou citizens to use on public transport.

So what does it mean? Is it really a revenge from the Matrix to the new Zion world? Is it really that bad for Bitcoin?  Most Chinese people tend to believe more in government than their western counterparts. Many believe the launch of Chinese DCEP will mark the agony of Bitcoin, as regulated tokens will replace unregulated tokens. However, the reality is, that Bitcoin is more like a digital gold, a new version of a store of value which could counter inflation in the future, while DCEP is more like a regulated stable coin such as USDC. It will not even defeat the unregulated one: USDT.

The central government will be the super administrator of Chinese DCEP and could look through all the transactions using DCEP, while Bitcoin investors are basically looking for refuge which seeks to evade from government control and protect their wealth from inflation dilution. They do not want to be traced or taxed, which is exactly against the use of DCEP. We still don’t know whether the Chinese government will allow the conversion between DCEP and crypto assets. We guess it’s “no”. But what if “yes”? Then DCEP will be the competitor against regulated stable coins such as Libra, and USDC. In fact, DCEP is designed to counter the huge potential impact of Libra and marks China’s ambition to further reinforce RMB internationalization. We all know that the current international payment system is based on SWIFT (Society for Worldwide Interbank Financial Communication), which is not very friendly to China under current circumstances.

China is in an urgent need of a new cross-border payment system which could circumvent SWIFT, and this leads to the idea of DCEP. The announcement of Libra further strengthens Chinese concerns that the US could reinforce its control over international payments. What is more, China fears Libra could lead to a de facto offshore USD market in mainland China as it will ultimately be pegged to USD. This explains why China  suddenly accelerated the test of DCEP following the introduction of Libra.

So DCEP is not targeting cryptos and will not compete against them. What’s more, if Chinese progressively accept DCEP and become increasingly familiarized with blockchain wallet and transfers, it will lay down a broad foundation for Chinese people to embrace crypto assets, as on-chain education used to be a serious barrier for most people to enter into the crypto world. This will be a long-term positive catalyst and it does lift short-term sentiments, though people tend to overestimate the short-term impacts while underestimating the impacts in the long run.