Ways Firms Can Seize Opportunities With China’s DC/EP Rollout
Firms that are timely prepared for the rollout of China’s digital currency electronic payment (DC/EP) project stand to benefit in about five ways from the effect it will have on the global economy, two authors have shared on the London School of Economic Business Review blog page.
Jemma Xu, the co-founder and general partner at digital investment firm, RedBlock Capital, and Dan Prud’homme, a research associate at Duke University’s Kunshan, China campus, note in the piece that firms can tap into the expansion of DC/EP which will facilitate the internationalisation of the yuan/renminbi (RMB) to make the Chinese currency a strong alternative to rival the current USD-dominated international payments system.
The DC/EP, which the authors say businesses can prepare for by having appropriate infrastructure in place to accommodate it e.g. digital wallets, third-party financial custodians contracts etc and by exploring interoperability options when conducting cross-border trade, could become the world’s first Central Bank Digital Currency (CBDC) as unveiled by former governor of the People’s Bank of China (PBoC), Zhou Xiaochuan. It has been touted to achieve several purposes from various quarters even though nothing has been confirmed officially.
Xu and Prud’homme expect the DC/EP project to facilitate direct transactions between digital wallets thus eliminating sizeable banking clearing and settlements costs as payment would turn settlement without the need for a separate clearing process. This will contribute to making new ways of raising capital and secondary trading via the issuance of digital securities (regulated with transactions and shareholders details recorded on the blockchain ledger) and disintermediated trading on exchanges available to firms.
With firms and investors gaining easier access to digital financial instruments, DC/EP will help catalyse fintech innovation and give rise to hybrid products that draw on both traditional markets and digital currencies. As a result, DC/EP will serve as a reliable alternative underlying-asset in the future that will stimulate the creation of more hybrid financial products, the authors say.
They added that DC/EP’s rollout may also cause aggregate demand to rise and its adoption enable governments to rapidly deploy “helicopter money” to the public without the need for bank accounts which will help to draw previously unbanked people into the consumer group fold.
As a stablecoin backed 1:1 by the PBoC with the RMB, there are indications that the Chinese authorities may integrate DC/EP with popular existing digital wallets widely used by many in China namely Alipay and WeChat Pay which a Financial Times report says are likely to be affected by the CBDC.
The author of Innovation Lab Excellence, China’s CBDC is not meant to destroy Alipay and WeChat Pay – which handle transfers and earn commissions – but rather being built on top of the efforts of these companies to digitize payment. He adds that though its rollout will impact these payment processors’ revenues and decrease their lock on digital payment in China but will not reduce their societal relevance as digital platforms.
Coupled with the overview of China’s Blockchain ecosystem by Ran Zhao, the Innovation Officer at the Innovation Centre Denmark in Shanghai, in which she cites that the DC/EP is mainly being issued to increase the efficiency with the circulation and payment of RMB, according to the director of the PBoC Digital Currency Research Institute, Changchun Mu, all eyes are on what would become of the DC/EP particularly since it was reportedly piloted in four Chinese cities.