Wednesday, December 16, 2020

Digital Renminbi

China is poised to launch the digital renminbi. 

This represents a logical development because China already leads the world in digital transactions, accounting for 44 percent of the global digital payments’ total transaction value.  

One hundred thousand residents in Suzhou, Jiangsu province, selected through a lottery, are participating in an upgraded pilot program of the digital renminbi that began on Friday. Unlike their 50,000 Shenzhen counterparts who participated in a trial program in October in which they had to spend the digital money offline – those in Suzhou can use the 200 yuan virtual red packets given them by the government to purchase goods not only in designated brick-and-mortar shops, but also via the official app of online retail giant JD until December 27, 2020. 

Simply put, the digital renminbi is a digital form of China’s physical currency. Powered by blockchain technology, it is distributed by China’s central bank to second-tier providers including state-owned banks and online payment providers, such as Alipay and WeChat Pay. 

These second-tier providers are authorized to transfer digital currency to individuals and businesses that can then make payments with money in their digital wallets. 

We should expect that with the advent of the digital economy era, it’s a matter of time before digital currencies take center stage. 

The coronavirus pandemic has further accelerated the development of contactless, mobile payments and the building of a cashless society, with central banks in major economies competing with each other toward this end. The European Central Bank, for example, have said they are "very seriously" looking at the creation of a digital euro. 

And at the forefront of this trend, China had started testing a digital currency as early as 2014, and it is considering amending its banking laws to pave the way for the issuance of the digital renminbi. 

Moreover, the digital renminbi does not need the internet. It also won’t require a bank account to access funds, so it will be of great benefit to the 20 percent of adults in China without bank accounts.  

Besides, this aspect of digitalization is part of the country's bid to internationalize its currency. For example, the digital renminbi could make it much easier to settle trade transactions with Belt and Road partners as they would no longer have to rely on a third-party currency to complete transactions. 

For sure, a plan is already in place to roll out the digital renminbi across China in the very near future.

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