For the past five years, China has been hard at work to develop a way to move closer into a cashless ecosystem. This effort gave birth to DCEP, which standards for Digital Currency Payment. Basically, China is taking hard cash and converting that into a digital equivalent and then circulating that digital currency back to the people and businesses. Yes, it has some characteristics of a cryptocurrency, but there are main differences that set it apart from how Ether or Bitcoin works. However, the concept is the same, to promote cashless transactions.
Is China’s DCEP A Cryptocurrency
The short answer is yes and no. Yes, in the sense that Digital Currency Electronic Payment requires users to have digital wallets in order to make deposits, carry out payments and withdraw digital money. These electronic wallets will be under banks such as the People's Bank of China. Instead of having hard cash connected to your traditional bank account, you'll have digital money; thus, physical money will become obsolete.
The unique aspect of this system is that users, in some cases, are not required to have a bank account to interact with the digital currency. Also, you don't have to be connected to the internet to transact. This will be similar to how smartphone users share data by bringing their phones closer to each other.
China's Digital Yuan is not a true cryptocurrency because, first of all, it's centralized (controlled by China's central bank), the transactions lack anonymity, and it can be described as legal tender.
The Benefits of China’s Digital Yuan, DCEP
The international market will have a more straightforward process of transacting with Chinese businesses because physical currency presents challenges such as exchange rates, which could lead to losses.
People who shy away from traditional banks will flock to the Digital Yuan due to lack of or minimal paperwork.
China has gone a long way with technological advancement in cashless transactions, but the DCEP will make life easier because all one needs is a smartphone. Gone will be the days when one carried cash and credit cards, which were at risk of theft and fraud.
This new digital currency will enable China's government to have a better understanding of the country's finances, which will lead to better governance and improved service delivery.
The Digital Yuan will discourage instances of fraud because all transactions are accessible by the authorities.
The Disadvantages of China’s Digital Yuan
The Digital Currency Electronic Payment will make it effortless for the Chinese government to monitor transactions, making it easier for population surveillance and implementing sanctions.
There will be a lack of privacy when it comes to individuals’ financial transactions.
The Covid19 pandemic is one of the factors why China expedited this project. It is the opinion of many people that physical money can contribute to the spread of the virus, so a cashless ecosystem may curb this problem. Whether central banks around the world will follow China's pioneering feat remains to be seen. But there is a high probability that a central bank's digital currency could be a solution to the threats regulators around the world suggest will be posed by Facebook’s Libra project.