Opportunities Brought by DCEP

On August 14, the issued plan by the Ministry of Commerce mentions the implementation of pilot projects about digital RMB in the Beijing-Tianjin-Hebei, Yangtze River Delta, Guangdong-Hong Kong-Macao Greater Bay Area, and regions with certain conditions in the central and western regions. It is mentioned in the article that the pilot project will be assisted by Shenzhen, Chengdu, Suzhou, and other relevant departments in the future Winter Olympics scene, which will be expanded to 28 regions including Beijing, Tianjin, Shanghai, and Chongqing as appropriate.

What is DCEP?

The digital currency is the abbreviation of digital currency electronic payment.

IMF refers to digital currency as Central Bank Digital Currency, and DCEP is a unique expression for internal research and development of China's central bank.

The director of the Central Bank's Digital Currency Research Institute has clearly defined it, that is, its functional properties are the same as banknotes, just a digital form, and a digital payment tool with value characteristics. DCEP refers to the digital currency issued by the central bank, which belongs to the central bank's liabilities, has national credit, and is equivalent to legal tender.

Compared with cash, DCEP can save papermaking, printing, cutting, storage, and transportation of the entire physical currency production process, which can reduce the cost of traditional paper currency issuance and circulation and improve the convenience of economic transaction activities.

What is the difference between DC/EC and Alipay Pay?

First, DCEP replaces M0. Its functions and properties are equivalent to the banknotes, except that the form is digital. While third-party payments such as Alipay and WeChat Pay use commercial bank currency settlement, which belongs to the digitalization of the M1 and M2 levels, and does not have the legal effect of the M0 level, let alone replace M0. M0 generally refers to the cash in circulation; M1 mainly includes M0 and current deposits of various units; M2 includes M1, resident savings deposits, unit time deposits, other deposits of units, and customer deposits of securities company.

Second, the DCEP payment only requires electricity, which means that it can realize dual offline payments. Binding with terminal equipment can complete basic operations such as cash withdrawal, payment, and storage of digital currency while the third-party payments require electricity and internet.

Finally, DCEP is legal and anonymous while third-party payments are not available.

DCEP Is of Great Significance Internally and Externally

Externally, DCEP is a strategic measure, which can lay the foundation for the smooth internationalization of the RMB. Each country hopes to seize the opportunity in the digitalization of the national currency to take the initiative in the competition of major powers.

After the advent of Bitcoin in early 2009, various non-governmental digital currencies have emerged in endlessly, which has brought great pressure on national sovereign currencies and has also prompted many central banks to study and launch legal digital currencies.

The acceleration of the research of digital currency and this large-scale trial by the Central Bank of China are mainly related to Facebook's launch of the digital currency Libra. On June 18, 2019, Facebook announced the launch of a digital currency, which aroused the vigilance of many central banks.

According to Facebook, Libra is positioned as a super-sovereign digital currency. If successfully implemented, the Libra Association may assume the responsibility that originally belongs to the central bank, which will be a challenge to the monetary sovereignty of any country.

Another deeper reason is due to the future layout of Libra. There is a huge business cooperation system behind Libra, that is, Facebook the leading company, covers nearly 2.7 billion users and 168 countries around the world, with such a large coverage area and potential mobilization capabilities, which will be a great resistance to the future promotion of digital currencies in various countries. Therefore, the primary purpose of issuing DCEP is to protect monetary sovereignty.

Internally, the release of DCEP is expected to not only reduce the cost of paper currency issuance and reshape the payment ecology, but also improve the efficiency of account currency placement. Besides, DCEP can maintain the attributes and main value characteristics of cash, and meet the requirements of portability and anonymity.

Investment Opportunities in the Central Bank's Digital Currency Industry

In general, the digital currency transformation can be roughly divided into three links that are issuance, flow, and security.

The issuance and withdrawal of DCEP are based on the dual system between Central Bank and commercial bank, in which the Central Bank is responsible for the issuance, verification, and monitoring of digital currencies, and commercial banks directly face the society and are responsible for providing digital currency circulation services and application ecosystem construction services.

Commercial banks are the main demand side of financial technology. After DCEP is promoted, the banks will establish a digital currency commercial bank library immediately, and make a corresponding transformation of the core business system and other related systems for the digital currency. Thus, professional IT service providers that build a huge and stable system will usher in challenges and opportunities.

The circulation link needs specific tools as a carrier to realize currency circulation. POS needs to increase the system settings that meet the requirements of digital currency, which caters to the industry's trend toward smart POS. As for the ATM market, the current ATM market has entered a period of saturation. In the long run, digital currency will coexist in cash for a long time, so ATMs also need to meet the requirements of digital currency redemption, and there is room for transformation. The upgrading and transformation of the two above provide development opportunities for payment service providers.

On the security level, DCEP with legal status which represents the national credit can be stored safely, conduct safe transactions, and conduct anonymous circulation. Therefore, the security attribute is the core guarantee, in which the key part involved, security encryption and KYC certification-related listed companies will be expected to benefit.

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