The question of how to quickly have financial inclusion especially in poverty-stricken areas has loomed largely in most banking and government policy decisions worldwide. A policy that if implemented well, could drastically bring down the problems of direct cash transfers to the poor, reduce financial corruption, eliminate transaction costs and save the global economy billions of dollars. A blockchain based sovereign digital currency system backed by a fiat currency seems to be the solution for this.
The first official and government backed move towards this was seen in 2014 when China’s central bank started related research work on the possibility of a digital yuan. A sovereign currency based on the blockchain technology, similar to what we see in today’s cryptocurrencies. But unlike cryptos, a national digital payments system would be backed by a fiat currency and be limited to the scope of transaction purposes. The digital currency would derive the same value as its fiat currency and not be based on speculations. Thus, expanding the blockchain technology to be used for a universally accepted digital payment format.
In early 2020, China started DCEP (Digital Currency Electronic Payment) pilots in four cities, Shenzhen, Xiong'an, Chengdu and Suzhou. It involved paying wages and subsidies through DCEP. The four major state-owned commercial banks in China have also officially launched internal tests, and Chinese citizens have already started using DCEP for daily payments, a situation supported by China’s heavy reliance on digital payments countrywide. China has also announced a formal introduction to the DCEP system for international usage during the 2022 Beijing Winter Olympics. Currently 19 international merchants are already onboard with the new DCEP rollout, including Oscar Studios, McDonald's, Starbucks, Sebago, Rooftop Station, Jingdong Unmanned Supermarket and CITIC Bookstore.
These payments would differ from the known digital payment methods offered by Ali Pay or We Chat, as DCEP supports offline payments. This helps to also account for China’s 60 million rural pocket users that may not have internet access yet. It also has the potential to cut down on bureaucratic corruption and help in direct financial aid to the targeted individual. DCEP, due to also being the legal tender opens up access to international bank accounts as opposed to Ali Pay or WeChat that have a sophisticated verification process and currently still need an individual to have a Chinese bank account. Many experts see this as China’s push to further internationalize the Yuan and also reducing the cost of RMB in circulation.
The use of blockchain technology by large banking institutions, would allow them access to higher quality data, and may be used among branches countrywide. As more and more transactions slowly move online, the quality of online data is bound to get better, thus promoting innovation in FinTech capabilities. However, these digital currencies have also started gaining some negative traction on concerns of data privacy. This is in contrast to cryptocurrencies’- blockchain activities that record digital ID. Cryptos operate freely and independently without contributing to the perpetuation of things like fraud and can operate without government intervention.
Similarly, Facebook’s Libra, still is in middle of controversies due to its private ownership, privacy issues and lack of state sovereignty. However, in Europe countries like Germany and France are also planning government level digital currency roll outs in the near future. In India too, the central government push for a cashless society has sown the seeds for similar strategies, giving room for exponential potential. DBS one of Singapore’s largest banks, has also be seen promoting its FinTech businesses as it opens up its first fully digital bank in India- DBS digibank.
With China already launching the pilot programme of its own digital currency, the question of the global race of a national digital currency for other nations now is more about catching up than winning. This presents China as a top candidate for FinTech innovation. Coupled with the fact that China has the second largest GDP, one can see how a large middle-class population remains the key ingredient for a flourishing financial system and the future of lending and insurance. An advantage other than China, currently possessed only by the 1.7 billion adults in Africa and 1.3 billion Indians.
Sources
Significance and impact of DCEP issuance
http://finance.sina.com.cn/blockchain/roll/2020-04-29/doc-iirczymi8942345.shtml
DCEP put into test
http://finance.ifeng.com/c/7vkTfqknK8e
A lesson about DCEP in Peking University