With DCEP about to be released, will Bitcoin face major challenges?

2020 also marks the beginning of a new financial era dominated by "digitalization". The central bank digital currency (CBDC) has officially entered the international financial market, and China is also vigorously advancing its plans for the central bank digital currency (CBDC), digital currency electronic payment (DCEP) system (also known as the "digital yuan"). With the large-scale pilot of DCEP in Shenzhen, Xiongan New Area, Suzhou, Chengdu and other regions, the release of DCEP is imminent.

It has been hailed as China's most ambitious financial technology solution so far, and some have suggested that it could help China replace the US dollar as the world's reserve currency. Since August, there has been a lot of news about the central bank's digital currency, and its progress has accelerated. If it can be launched in a short period of time, it means that the People's Bank of China will become the first central bank in the world to officially release a digital currency. This is conducive to the international circulation of the RMB and the settlement of international trade, and there is hope that it will break the world monetary economic system dominated by the hegemony of the US dollar.

The rise of DCEP is a mixed blessing for supporters of cryptocurrencies like Bitcoin. On the one hand, it is an endorsement of the concept of digital currency, and mainstream adoption of CBDC can help promote the wider adoption of encryption technology. On the other hand, the centralized nature of CBDC is completely opposite to decentralized cryptocurrencies such as Bitcoin. If DCEP is widely adopted, is it possible for it to replace Bitcoin? Where should Bitcoin go? Will it continue to sing all the way or sink into the dust?

To answer this question, it is necessary to delve deeper into the fundamentals behind both currencies.

Different types of digital currencies

Regarding the comparison between DCEP and Bitcoin, let’s first take a look at a picture:

From the figure, we can clearly see that Bitcoin and DCEP are both forms of digital currency, but they are issued by completely different entities. Bitcoin was initiated by an anonymous founder, Satoshi Nakamoto. It is not issued by a specific monetary institution, but is generated through a large number of calculations of a specific algorithm. The Bitcoin economy uses a distributed database composed of numerous nodes in the entire P2P network to confirm and record all transactions.

Created by China’s central bank, the People’s Bank of China (PBoC), DCEP aims to digitize the country’s cash circulation. It is not a simple digitization of paper money, but to replace paper money and coins, change the form of base currency, and give the government full control over the whereabouts of every penny.

In terms of technology, Bitcoin is a cryptocurrency based on cryptography and a decentralized transmission model that relies on blockchain technology.

DCEP does not actually use blockchain as part of its underlying technology. It uses a “binary operating system” where the People’s Bank of China is the sole issuing database for DCEP.

By comparison, we can have a simple understanding: the main difference between DCEP and virtual currencies such as Bitcoin is that the former is backed by sovereign credit, while the latter is not. The essence of the central bank's digital currency is legal tender. In the legal tender environment, the central bank is not only the leader in currency issuance, but also a strong endorsement of the monetary management system. Bitcoin is a monetary management system based on blockchain technology, and all use value and price come from consensus.

Having clarified the basic definitions and differences between DCEP and Bitcoin, let us now answer the question “Will DCEP replace Bitcoin?”

Will DCEP replace Bitcoin?

The answer is obvious, no. The reason is simple. DCEP, as a legal currency, belongs to a different level from Bitcoin and has different missions to accomplish, so there is no absolute competitive relationship between them.

DCEP is the RMB, a legal tender whose price is equal to its face value and never fluctuates, so it has no value for speculation. This difference makes DCEP unable to be directly compared with Bitcoin, which is known as "digital gold", and there is no such thing as DCEP replacing Bitcoin. Here, Crypto Notebook reminds everyone that DCEP will not have any effect on the price of the currency in the short term. Many altcoins claiming to have cooperation with DCEP or cross-border finance are also trying to cut leeks, so please stay vigilant.

Although DCEP cannot replace Bitcoin in terms of value, it does not mean that DCEP has no impact on Bitcoin. It may even bring major challenges to Bitcoin.

One of the most notable features of DCEP is its centralized management, which runs counter to the decentralized Bitcoin. Although DCEP will also adopt the decentralized mechanism of blockchain like private digital currencies, in order to control the direction of monetary policy serving the real economy and prevent the risk of financial market fluctuations, the issuance of DCEP will still adopt a "centralized" approach, that is, it will be issued and controlled uniformly by the central bank.

"The issuance, printing, collection and storage of existing banknotes and coins are costly, the circulation system has many levels, they are inconvenient to carry, easy to be forged, and anonymous and uncontrollable. There is a risk of being used for illegal activities such as money laundering, so it is necessary to digitize them." This is one of the core reasons for the birth of the central bank's digital currency. By monitoring data and flows, it is more helpful for the central bank to conduct precise supervision and regulation and combat illegal activities such as money laundering. Although the generation of DCEP has inherent anonymity, encryption and decryption are monitored by the Chinese government in accordance with the law, and true anonymity does not exist.

Given that the spirit of Bitcoin is almost the opposite of that of DCEP, it raises the question of whether China might be trying to suppress Bitcoin in order to promote the use of its own digital currency. Bitcoin investment currently has no clear legal basis to prove its legality in my country, and the Chinese government has historically taken a negative attitude towards the cryptocurrency, promoting the saying "blockchain, not Bitcoin" and banning all websites related to cryptocurrency trading in 2017.

Although the audience of Bitcoin is expanding, it is constrained by the transaction itself. Only a small group of people in the currency circle actually use or own Bitcoin. It has not been applied to more substantial industries, and is even widely used in gray transactions. Therefore, its real appeal is still limited. Therefore, when DCEP really arrives, it will inevitably squeeze the living space of Bitcoin and bring major challenges to it.

Coexistence of BCEP and BTC

Fortunately for Bitcoin supporters, Chinese Bitcoin miners already dominate the Bitcoin network’s hash rate, and a complete ban on cryptocurrency would be counterproductive because it would eliminate China’s means of controlling cryptocurrency. For the digital currency market, only compliance and regulation can usher in good development opportunities.

A country cannot actually ban Bitcoin, and to put it another way, without Bitcoin, DCEP would not have been possible. However, its centralized digital RMB is so different from Bitcoin that the two are likely to coexist rather than compete directly.

In the limited history of Bitcoin, it has encountered countless obstacles, including suppression from the national level, but this has not really destroyed Bitcoin, but has promoted its accelerated development. This shows that the inner core of Bitcoin must conform to the needs of the times. DCEP has incomparable natural advantages, but Bitcoin is not completely powerless. If the two are combined, they will burst out with greater vitality; otherwise, they will weaken each other and lead to the loss of their own value.