Authors: Wang Wen (Executive Dean, Chongyang Institute for Financial Studies, Renmin University of China) and Liu Yushu (Director of Macro Research Department, Chongyang Institute for Financial Studies). Edited version published in Global Times Magazine, Issue 2, 2021.
The Dawn of Digital Finance in China
China's "14th Five-Year Plan" marks a pivotal shift toward digital currency development, emphasizing the "prudent advancement of digital currency R&D" and the integration of digital and real economies. This strategic move unveils a new era of digital finance, where risks—characterized by suddenness, opacity, and heightened destructive potential—demand unprecedented vigilance, especially regarding hidden challenges in the evolving digital currency landscape.
Classifying Digital Currencies: Five Key Categories
1. Electronic Money (e-money)
- Broad Definition: Value stored electronically (e.g., chip cards, hard drives), as per the Bank for International Settlements (2015).
- China’s Strict Definition: Legally issued digital equivalents of fiat currency (e.g., Alipay, WeChat Pay).
2. Virtual Currency
- Defined by the European Central Bank (2015) as digital value not issued by central banks or credit institutions, excluding fiat money (e.g., Q coins, game credits). Cryptocurrencies like Bitcoin fall under this category.
3. Cryptocurrencies
- Decentralized digital currencies relying on encryption (e.g., Bitcoin). Oxford Dictionary notes their use in peer-to-peer transactions without central oversight.
4. Digital Currency
- IMF (2016) categorizes this as encompassing virtual and electronic money, enabling instant, borderless transactions.
5. Central Bank Digital Currency (CBDC)
- Sovereign-issued digital fiat (e.g., China’s Digital Yuan). Distinct from private cryptocurrencies like Libra.
👉 Explore the future of digital currencies
The Global Chessboard: Digital Currency Competition
Private vs. Sovereign Digital Currencies
- Private Cryptocurrencies: Bitcoin exemplifies decentralized models, sparking debates on monetary policy.
- CBDCs: Over 80% of central banks are researching CBDCs, with 10% in pilot phases (BIS, 2020). China’s Digital Yuan (DC/EP) leads alongside Sweden’s e-Krona and Uruguay’s e-Peso.
Geopolitical Tensions
- Data Sovereignty: EU-US clashes over privacy (e.g., invalidation of the Privacy Shield Pact) highlight jurisdictional divides.
- Monetary Hegemony: Libra’s potential to bypass USD dominance alarms regulators, underscoring the strategic stakes in digital currency control.
China’s Strategic Edge: Digital Yuan (DC/EP)
Key Advantages
- Financial Stability: Enables real-time monetary data tracking, enhancing crisis management.
- Global First-Mover Status: China’s "dual-layer" digital currency framework sets a global benchmark.
- Regional Integration: DC/EP fosters flexible financial partnerships, particularly in Belt and Road economies.
- Fiscal Innovation: Supports parallel development of financial and fiscal systems, mitigating systemic risks.
👉 Learn about digital currency innovations
FAQs
Q1: How does DC/EP differ from Bitcoin?
A1: DC/EP is a state-backed digital fiat, whereas Bitcoin is a decentralized private cryptocurrency.
Q2: What risks do digital currencies pose?
A2: Risks include regulatory gaps, privacy concerns, and potential disruption to traditional banking.
Q3: Why is China advancing DC/EP?
A3: To bolster yuan internationalization, enhance payment efficiency, and secure monetary sovereignty in the digital age.
Conclusion
Digital currencies are redefining global finance, with China’s DC/EP at the forefront. As nations navigate this transformation, the balance between innovation and regulation will shape the future economic order.