It could mainly become a payment tool rather than a storage of wealth.
China’s planned digital currency could offer lessons to other aspiring nations, aside from cutting transaction costs and lowering fee revenue for payment service intermediaries, according to a S&P Global Ratings report.
As the first G-20 country to trial a digital currency, China commenced the trial in October through handing out $1.5m (CNY10m) in tokens of Digital Currency Electronic Payment (DCEP, or digital renminbi) to users in Shenzhen. Users were able to make purchases at selected stores via a designated approved software application.
After a transaction, the ownership title of the digital renminbi changes hands from the customer to the merchant and this is registered with the People’s Bank of China (PBOC).
The digital renminbi could predominantly become a payment tool rather than a storage of wealth should the trial lead to a wider adoption, analyst Harry Hu opined. It will unlikely replace bank deposits given that it does not bear interest, but the DCEP could grant a cheaper and more convenient way of paying for retail items, and will compete with payment services provided by payment companies and commercial banks.
"In our view, the direct link maintained between the central bank and the token digital renminbi is the key differentiator from paper and e-money," Hu added.
In addition, because ownership of the digital renminbi never transfers to the commercial bank, digital currencies do not sit on the balance sheets of the commercial banks. DCEP remains a direct liability to the PBOC, same as cash and coins.
Live data feeds on digital renminbi transactions would benefit the PBOC's visibility on economic developments, especially as China transitions into a more consumption-led economy. Authorities could also leverage available information to implement more targeted fiscal policies, such as more precise household transfers and benefits allocations, the report concluded.
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