China is moving closer to launching a sovereign digital currency. Released ahead of the fifth plenum, the central government’s major policy meeting, the draft law by the country’s central bank will establish the digital yuan, formally known as the Digital Currency Electronic Payment (DCEP) system, on par with the fiat currency. Though no firm date has been set, the speed and ambition with which Beijing has moved to set up a digital yuan will likely realise a fully cashless society sooner than anyone.
The formal legal framework for the digital yuan means it is effectively a fiat currency backed by the central bank for every yuan it issues, whether electronically or in print. It will be treated as what economists call M0, that is, the same as paper notes and coins in circulation. The potential convenience and ease of use are obvious. Distributed through commercial banks, you can go to any outlet and withdraw yuan with the options of receiving physical notes or their digital equivalents.
More importantly for Beijing, the new money system will offer the central bank and other financial policymakers a real-time view of how money is being used. For the first time, authorities will know where every yuan goes and how it’s spent. Such insights will literally give a greater bang for the buck or yuan, on how authorities formulate, and respond with, monetary policy, stimulus spending, and dealing with inflation and deflation, as well as recession and other economic conditions.
