China’s new digital currency comes with an expiry date for better and worse

WHY THIS MATTERS IN BRIEF

As we enter the era of digital programmable money China has now started introducing money that expires, and it can be used to stimulate the economy or just make activists pennyless …

 

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The Keynesian dream to “boost the speed of money” may finally come true after the Chinese government announced it’s exploring “money with expiration dates,” using its prototype Central Bank Digital Currency (CBDC) digital yuan, or DCEP, as the guinea pig in a move that literally means your money, or the money you are given by the government, will expire if not used in a certain timeframe. And while this can be used to stimulate the economy if combined with China’s Social Credit Scoring system it could also mean that if you don’t behave, or meet particular “criteria” set by the government, your money could just expire if they want it to and let it, thereby giving them a new weird tool to keep people in line.

 

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The digital yuan is programmable to the point that the currency can be made to expire, thus forcing consumers to use it up by a certain date. This is a twist on an obscure, unconventional monetary policy innovation known as a Gesell currency: expiring money, which gives the issuing government a heightened degree of control over money velocity, AKA how fast it’s “supplied” and how fast it’s spent.

DCEP is the digital version of the yuan, China’s physical currency, and it’s legal tender in the country, being issued by the central bank. In a centralised system, the People’s Bank of China (PBoC) would issue DCEP to commercial banks against equivalent cash or banks’ deposits at the central bank. Commercial banks would then distribute DCEP to their clients.

The PBoC can also pass it to other intermediaries to hand out as well. DCEP as a digital unit resides in digital wallets, whose app will be authorised by the PBoC and can be downloaded by users although it’s still unclear whether downloading the app would require formal registration.

 

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It has been claimed that DCEP can be transmitted directly from wallets to wallets independent of banks or any other intermediaries via the internet or phone connections, or in the absence of those connections, by putting two mobile phones close together – probably using Near Field Communication (NFC) protocols.

So why have money with an expiry date? Programmable money, tied to real-world identities, and universally tracked by a central bank, is like a substitute for the consumer of last resort. Every year that China gets richer, domestic consumption plays a bigger role (exports were 26% of China’s GDP in 2010, and 18% last year). If domestic consumption can be tightly controlled, then it’s a way to not just increase the volume of consumption but to control the variance of demand for the goods China produces.

For now the digital yuan doesn’t live on a public ledger, it’s controlled centrally by the authorities, to be changed if, and when, political whims require such. The DCEP is not a peer-to-peer cryptocurrency but rather requires the use of officially regulated financial intermediaries. It also doesn’t have a market-based valuation independent of the old physical version of the currency – they’re tied together. The digital yuan also doesn’t have an algorithmic protocol dictating the production of new assets – akin to money creation – much less an end date at which point no more will be created. It is a currency with a discretionary money supply controlled entirely by the government.

 

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It also gives the Chinese government a new way to surveil the population, creating new data which can be tracked by authorities, which could be especially useful as other cryptocurrencies like Bitcoin have pseudonymous protections for user privacy.

In October of 2020, China became the first nation to hold a trial run of its digital currency, when the government in Shenzhen carried out a lottery to give away a total of 10 million yuan, about $1.5 million, worth of the digital currency. Nearly 2 million people applied and 50,000 people actually “won”. The winners were then required to download a digital Renminbi app in order to receive a “red packet” – a customary Chinese tradition used to give money to people – worth 200 digital yuan ($30), which they could then spend at over 3,000 designated retailers in Shenzhen’s Luohu district, according to China Daily. After that, they were then able to buy goods from local pharmacies, supermarkets and even Walmart.

In this case the idea was to not only test the technology involved, but boost consumer spending in the wake of the COVID-19 pandemic. In short, China is not only subsidising the centrally planned economy by manipulating the supply-side of money – it now can prop up demand by handing out digital currency to anyone that expires if it’s not spent, so this will be a very interesting experiment to watch.

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