16 October 2020

Dreams of DCEP-tion

This week, 10 million DCEP worth about $1.5 million was airdropped to 50,000 randomly selected people.

While that sentence reads like a 2017 CoinDesk byline, DCEP is not your run of the mill shitcoin; it’s China’s digital currency (DCEP stands for Digital Currency - Electronic Payment).

To dish out these fresh digital bills, the government held a lottery in the city of Shenzen, where according to officials, nearly two million residents registered to enter. Winners were able to claim their prize, amounting to about $30 USD, by downloading a digital wallet through a state run app. From there, they could spend it at 3,800 designated outlets.

So if you’re like me, you're reading this and asking yourself, “what is this thing?”

How exactly does DCEP work?

Once I set out to answer that question, I soon realized that the CCP has been stingy with releasing any official documentation for our reading pleasure. Most reports seem to cite comments made by Chinese officials in the wake of Facebook’s Libra announcement. (The Block’s mammoth CBDC report and Boxming are each solid resources.)

DCEP is issued by the People’s Bank of China (PBOC), pegged 1:1 with the Chinese Yuan and backed by PBOC reserves. As you can probably guess, China’s digital currency won’t have all of the hallmarks of your typical cryptocurrency. For one, there won’t be a publicly auditable ledger or an underlying distributed network of rational economic actors maintaining it. The CCP will handle that part through a two-tier system of databases in cooperation with commercial banks.

Reports do seem to suggest that DCEP is made out of some of the same “stuff” as bitcoin and its brethren. Specifically, asymmetric cryptography (public & private keys) and some level of a UTXO transaction model. These elements will allow DCEP to mimic the peer-to-peer nature of bitcoin, but with full traceability and without any of that pesky pseudo-anonymity.

While details will likely continue to trickle out about its specific design, at this point it's clear that China’s DCEP is a different kind of beast when compared to your typical government issued fiat currency.

China’s Motivations

There’s a lot of reasons why China has been barrelling ahead with a digital currency.

From a government perspective, the ability to inject money into select populations comes with its benefits. For example, if certain regions need aid during a pandemic, officials can essentially press a button and deliver funds just as efficiently as delivering lotto winnings. In general, DCEP should give the Chinese precision control over its monetary policy.

Another commonly cited motivation for China’s DCEP is to claw back some of the power from the duopoly of WeChat Pay and AliPay - the dominant means of payment in China. Additionally, where WeChat Pay and AliPay are difficult to access without a Chinese bank account, DECEP will be accessible to anyone who downloads the government’s digital wallet. This should make the Yuan more accessible to outsiders, which is very much in China’s interests.

China has also made no secret of its ambitions to be the world’s dominant superpower. To achieve that, it helps to have your currency be dominant in all forms of trade. China believes the way to break the global monopoly of the US dollar is by building a better product. Where the good ole USD is running on decade old infrastructure, DCEP has been built for the digital age.

As China’s Belt and Road Initiative seeks to better connect Asia with Africa and Europe through economic cooperation, it’s in China’s best interest that trade can be conducted without the US dollar. Just as the CCP can spark economic activity in Shenzen by instructing people to download an app, they’ll likely look to implement similar measures at the commercial level.

Global Response

It’s hard to discuss DCEP without mentioning its potential to be an Orwellian nightmare. Patents filed by the PBOC cite, “controlled anonymity”, as a key feature. This will allow two parties to transact anonymously with one another, while giving the central bank access to all transactional information.

If you’re a Western power, you’re likely less concerned about potential privacy issues and more concerned with this new payment system’s ability to bypass the Western-dominated SWIFT system for international payments altogether. This would make anyone using the new system impervious to any form of economic sanctions - a compelling draw for the Russians, Irans, and Venezuelas of the world.

The heat is on for Western powers to ramp up their efforts to modernize their financial systems, or risk being leapfrogged by a new one. Look for central banks around the world to accelerate their efforts to fully digitize.


Article initially appeared in Messari's Unqualified Opinion's newsletter. Subscribe here.

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