The development and implications of the digital yuan
Plans to introduce a digital yuan (e-CNY) in China are not only an economic intervention, but driven by political and regulatory motives. Chinese regulators have made it clear they want to limit the growth and reach of the two largest cashless payment platforms – Ant Group’s Alipay and Tencent’s WeChat Pay.
Ant’s record $37 billion IPO scheduled for November was derailed by regulators in April this year by the imposition of an order to restructure the business. The group, founded by Jack Ma, was also hit with a $2.8 billion antitrust penalty the same month.
And now a number of state banks have been enlisted to promote the benefits of having a digital yuan, so consumers do not need to rely solely on private sector payments platforms.
So what is the digital yuan?
It is simply a digital form of the fiat currency issued by the People’s Bank of China (PBoC). It doesn’t yet use blockchain and it isn’t a cryptocurrency. It is pegged at parity to the yuan and is backed by the central bank. Transactions under RMB 2000 are anonymous, or will have ‘controllable anonymity’, says PBoC.
“The digital yuan is currently technology-agnostic; as it matures, it will leverage different technologies, says Meng Liu, an analyst at Forrester. “It is now in its early phases and has yet to be officially launched to all citizens in China.”
Consumers must use a digital wallet to transact, but this will operate a sub-wallet, that does not provide user data to the merchant. This won’t compete with deposit accounts, says the PBoC, as they remain the liability of commercial banks, and the digital yuan the liability of the People’s Bank of China. This should provide greater stability for the embryonic currency.
A report by Forrester highlights four key principles and use cases for the digital yuan:
1) The first is to increase financial inclusion. Because as cash is used less in China, more than 225 million have become excluded from financial services. The government says financial aid can be given to organisations and individuals more quickly and efficiently.
2) Then there is the internationalisation of the yuan, which the e-CNY can help facilitate.
3) The e-CNY is also part of the Chinese government’s campaign to break the duopoly held by Alipay and WeChat Pay.
4) And finally, it seen as a way of protecting the yuan against private cryptocurrencies.
Not for competition?
The People’s Bank of China says the e-CNY will not compete with private sector platforms, and claims it is not seeking to depose the current market leaders. Instead, it is building the digital currency as a complementary system, according to a Reuters article in April this year.
However, the same article quotes a banking official responsible for the promotion of e-CNY as saying: “Big data is wealth. Whoever owns data thrives. WeChat Pay and Alipay own an ocean of data,” and he suggested the rollout of e-CNY will strengthen the government’s antitrust campaign against these large companies, and provide the government greater control of this big data.
Data certainly seems to be a primary target, with China seeking furthermore to become a global leader in financial technology. After all, in a digital world, data is power. And increasingly, the use of AI and machine learning is delivering considerable knowledge about markets and consumers.
Central Bank Digital Currencies (CBDCs) are a hot topic among a number of central banks who are at different stages of testing the use cases and potential implementation of their own digital currency.
The development of the digital yuan is as important to the Chinese government as artificial intelligence and robotics within the emerging technology space. China would also like the renminbi to become an international currency, as it currently only represents 2% of global foreign exchange reserve assets.
While its digital yuan will provide the government with an immediate and accurate picture of the influence of monetary policy. It will also allow it to monitor illegal activity. That means domestically it is likely to be used to enforce party discipline. And those outside China will worry that data gathering and processing might be abused to further the nation’s geopolitical policies. Without reforms to China’s financial system, many nations will consider it to be too great a risk to national security. Certainly, as it is imposed on Chinese nationals and companies, or those operating within China, it will increase the financial reach of the Chinese government.
Are there winners and losers?
Controllable anonymity will protect individual users’ data, and identifying fraud or financial crimes may be enhanced by the analysis of big data. Commercial banks will save money by having to process less cash and if the digital yuan becomes popular, they will have a toehold in the payments battle against Alipay and WeChat Pay. This could lead to a proliferation of platforms, or at least a greater opportunity for other platforms to compete with these behemoths.
“The high trust, security, and privacy that the digital yuan offers may induce consumers to use the digital yuan more and Alipay and WeChat Pay less,” says Liu. “For smaller platforms like Meituan, Didi, and ByteDance, the digital yuan creates more opportunities than challenges, as they lack the dominant position and financial services customer base of the giants and can leverage the digital yuan to expand their digital payments and financial services offerings.”
There is a trade-off for merchants too, as controllable anonymity limits how much data they will have about their consumers. However, payments will be faster and transaction costs reduced, potentially to zero as opposed to the minimum 0.6% per transaction that card networks charge.
The digital yuan will undoubtedly undermine card networks, as well as the large payment platforms, as direct payments in a digital currency will render debit and credit cards largely irrelevant. Controllable anonymity and zero commission fees will be the catalyst for change. High value transfers are likely to favour the digital yuan, which will be seamless and instant, rather than subject to the delays of traditional payments. If blockchain is incorporated over time, then the security of and record keeping of these transfers will become more robust.
No way to avoid it
The digital yuan’s use cases have been proven across retail and e-commerce transportation, and entertainment venues in a number of pilots, notably in Shenzhen, where 10 million yuan was given to half a million residents to use at both online and offline retailers.
Instant settlement for business to business is also highly appealing and JD.com was the first major business to pay its employees in the digital currency. And in August 2021, some government workers in Suzhou received their salaries in digital yuan.
“The digital yuan has been continuously tested and rolled out in China and should officially launch to all Chinese citizens and enterprises in the next three years, says Liu. “It’s already changing industries like retail and financial services and will affect more verticals in the future. Digital business and technology leaders need to think deeply about the digital yuan and their plans for it.”
This juggernaut won’t be deflected and it is gathering speed. It won’t be long before China has established its digital currency at home if it proves as frictionless as other platforms. After that, who knows how far its reach could spread?