Why China is launching its Digital Currency e-RMB?

Anybody who has even been to China would acknowledge cash is seldom used in the big cities. Wallets and multiple apps like Alipay, Wechat etc, have pioneered the payment system and revolutionized e-wallets.

China in the recent decades has been in the forefront of technology and is home to some of the biggest technology giants like Tencent, Huawei and Alibaba among many others. From an export focused economy to becoming the technology hub of the world, it has come a long way. It revolutionized digital payments system by introducing Wechat, Alipay and other e-wallets for the masses much before others. So it doesn't come as a surprise when China has decided to test its digital currency the e-RMB in its four major cities. The pilot run started in April in cities of Shenzhen, Suzhou, Chengdu and Xiong'an. 

The concept of this digital currency is very much like electronic transfers but the difference is, in electronic transfers the money is just being debited and credited electronically on the ledger while this digital currency will sit like physical cash in digital form in your smartphone wallet app so you don't have to carry physical cash around. It would be fully backed by the government of People's Republic of China. It is a step towards minimizing the use of physical cash, track the use and spending of individuals while giving authorities more control over its flow.

The pilot run is being carried out to make sure the implementation remains smooth and it does not cause any kind of disruption in the existing money which is in the market. We need to understand that Wechat and Alipay are already in the business of smartphone wallet app and payment gateway business. This new system might be a direct competition to them. Also the authorities are worried it should not start people to move away from banking etc. If people don't keep their money with the bank, the banks can't give credit to anybody and credit flow might choke. Also the wallet business is kind of monopolized by these two tech giants and government wants to hedge its position.

While China was one of the first countries to act against independent cryptocurrencies like Bitcoin but it saw an opportunity to regulate such a system and use it for their benefit. That is when they started to work on their own form of Digital currency with the full political backing from top Chinese communist party officials. This will also give them the first mover advantage as far as any government authority backed digital currency goes and they feel it might make them a global leader in this space.

There are concerns regarding some countries bypassing US sanctions as it would be very hard to track the money trail in case this digital currency is used. US authorities have said China is trying to go around USD dominance and trying to find alternate ways to shield its allies from american sanctions. Though oil and other commodities have been pegged against USD so it would be a problem for China. Whatever may be the reason, this move from China has again sparked a debate about the future of digital currency. 

This will certainly come as a boom for many million Chinese citizen who do not have access to bank accounts. This digital currency can make their life easy and help them move on to the grid. This system might be further integrated with the Chinese social credit infrastructure and movement of money can be tracked. People with greater social score might be allowed to move more money while people with lesser score can avail limited benefits etc.

Conclusion:

There are many benefits of digital currency and no doubt China can see that to take advantage. The receptiveness of Chinese people with new and emerging technology is going to help China a great deal with the national roll-out of this initiative. While it will make life easy for a lot of people who are still not a part of the banking system, it might also leave the bank credit system high and dry if not kept in check. The potential and use of this digital currency is enormous and will further help China in tracking the money movement and would give a fillip to its idea of a social credit and surveillance system where they will be able to see and monitor everybody including their spending and money movement as nobody would stay "off the grid".