China is working to be the first nation to implement a total central-bank digital currency (CDBC) into limited use, according to a report from the brokerage firm Citic Securities.
The China-based firm said that the Chinese government is testing the digital currency system by paying for half of the cost of travel for government workers in certain cities in the nation, The Economist reported. The cities are Shenzhen, Suzhou, Xiongan and Chengdu, and the Xiangcheng district of Suzhou is expected to begin the test in May.
As the world deals with the coronavirus pandemic, central banks have begun cleaning paper currency that might be contaminated with the deadly virus, which has infected 3 million people and killed more than 200,000, according to the latest research data from Johns Hopkins.
Dozens of central banks have begun to look into digital currency, but none more so than China. Digital currency users would theoretically be able to use and transfer cash without an internet connection, according to the Economist, possibly by using Bluetooth.
But a digital currency could also give the Chinese government a powerful tool to easily monitor and manipulate spending, more so than it is already accused of doing. China would also be able to track all the money in circulation, making it difficult to launder money or evade taxes.
China could also make it easier to make nominal interest rates negative and ensure that money is activated only once loans are transferred to a small firm, for example. Cash would no longer be an alternative to bank deposits, too, according to the report.
Last year, mobile financial transactions in China accounted for four out of every five payments. Citic Securities also noted that the total size of China’s digital currency over the coming years could reach 1 trillion yuan, or about 140 billion U.S. dollars. That would mean about one-eighth of China’s cash would already be digitized.
For comparison, the current total market cap for all digital currencies, including popular Bitcoin cryptocurrency, is about US$200 billion.
Given the risk of the change, China might phase in the digital currency gradually and Citic Securities estimates that it would take several years before a digital yuan could replace just 10 percent of all physical cash in China.
A photo of China’s digital currency plan leaked on the internet in mid-April, the South China Morning Post reported.
— Kina i Danmark (@ChinaInDenmark) April 27, 2020
The image is supposedly from a test version of a mobile app developed by the Agricultural Bank of China, one of China’s largest state-owned banks, to be used by some Chinese Communist Party members in the currency’s test run in May.
“It’s supposed to be confidential at this stage,” an anonymous source told the South China Morning Post. “This leak offers the first look into what China’s digital currency may look like for the general public.”
A second anonymous source told the SCMP that the picture was authentic.