Where Does China’s Digital Currency Stand?

where does chinas digital currency stand
where does chinas digital currency stand

China’s digital yuan, or eCNY, is a trailblazer in the realm of central bank digital currency, getting off the ground at a much quicker speed than counterparts pursued in the West and Japan. The People’s Bank of China (PBoC), the de facto Chinese equivalent to the Federal Reserve, backs the currency, which can then replace cash in circulation.

The revolutionary new currency has thus far made its debut through lottery systems, which allocate funds to users who are randomly selected. Typically, these “winners” receive a set amount of digital yuan in the form of a virtual “red packet,” the traditional Chinese way of gifting money. They are then able to use the currency for purchases at any vendor that accepts it. To this date, more than $40 million has been distributed in eCNY. Popularization efforts have mostly focused on the five major global cities of Shenzhen, Suzhou, Beijing, Chengdu, and Shanghai.

The eCNY largely operates via what is known as a two-tiered system. In such a structure, the PBoC works together with commercial banks in order to foster acceptance of the digital yuan using their existing infrastructure and mobile applications. This portends a more free-flowing adoption process, with the central bank not needed to hijack the entire payment apparatus in order to foster acceptance of the digital currency. Consumers would have the flexibility to incorporate the eCNY into their accounts on commercial bank apps rather than necessarily having to familiarize themselves with a new system.

Chengdu became the first city nationwide to accept the digital yuan as payment across its entire vast public transportation system. Other cities, including Beijing and Suzhou, have implemented pilot programs allowing subway fares to be paid via eCNY. These low-cost, high-frequency transactions are an ideal avenue for testing the robustness and practicality of the PBoC-backed digital yuan before propagating it on a grander scale.

The usage infrastructure for the eCNY is not sharply different from what Chinese consumers are already accustomed to with Alipay and WeChat Pay. In fact, a former PBoC director stated the initial impetus for the development of the digital yuan project was in part to counter the ubiquity and strong market share of those mobile payment giants. Like those payment platforms, the digital yuan will operate through a consumer digital wallet that allows funds to be stored and then transferred for expenditures. Last month, the central bank reported that users will be able to register for a wallet allowing for daily expenses of up to 5,000 RMB ($770) using only a mobile phone number. However, for larger volumes, stricter identity checks and links to an onshore bank account will need to be demonstrated.

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One potential advantage over the existing mobile payment platforms is that the eCNY will not require an internet connection on either side of the transaction, as physically touching the phones together will also be a mechanism for transfer. This is known as hardware wallet technology, as it does not require a software application in order to clear the transaction. Telecom giant Huawei began rolling out the feature on its mobile devices in late 2020. Other types of hardware methods have been piloted as well, including contactless cards and even wearable devices that can perform payment operations all without a wireless network. These diverse methods of utilization aim to make the digital yuan more accessible, with the elderly or impoverished less likely to retain smartphones. The currency will further not have any service fees associated with its usage.

More and more vendors have signed on to the eCNY in recent months as it scales up for a full-scale launch. The Industrial and Commerce Bank of China (ICBC), one of China’s “Big Four” largest commercial banks, announced that it would allow ATM conversion between cash and digital yuan, becoming the first bank to do so. In anticipation of Beijing’s hosting of the 2022 Winter Olympics, more than 200 vendors in the west suburban district of Shijingshan, where many events will be hosted, have begun accepting the eCNY for purchases, with an eye geared toward foreigners perhaps being allowed to use eCNY (if spectators are allowed at the Games, given pandemic conditions).

Even the large tech players have come along for the ride. JD.com, one of China’s largest e-commerce platforms, started paying some employees using digital yuan in January. Cab hailing app Didi Chuxing as well as on-demand service provider Meituan also accept the eCNY for user payments. Ant Financial’s Alipay, once thought to face a potential threat from the introduction of the eCNY, likewise adopted a cooperative approach, with MYbank, an online banking entity 30 percent controlled by Ant, joining the digital yuan wallet in May as its seventh participant. Alibaba’s platforms Eleme, Tmall supermarket, and Hema have further supported the payment function of the eCNY. Tencent, the other player in the mobile payment duopoly, also plans to join the fray through its affiliate online bank WeBank.

Last month, China’s central bank even used the eCNY to distribute salary payouts to employees working on spring afforestation projects in the Xiong’an New Area in Hebei Province, making use of a blockchain digital ledger in concert with the digital yuan for the first time. This successful trial could pave the way for other employers, both public and private, to utilize this blockchain technology in divvying out compensation in the future by way of the digital yuan. That same former PBoC director even mentioned the possibility that the digital currency could run directly on a blockchain network such as Ethereum or Diem in the future. This would allow for users that do not have commercial bank accounts to be able to use the eCNY uninhibited, making the overall financial system more inclusive. The recent ban on cryptocurrency mining within China’s borders could further spur adoption of the digital yuan, as domestic consumers are left with fewer substitutable alternatives. Although certain cryptos have found themselves in the crosshairs, that certainly does not imply Chinese disdain for blockchain as a whole.

Though on the surface the technology underlying the eCNY may sound similar to Bitcoin or other popular cryptocurrencies, one pivotal difference is the level of centralization associated with the digital yuan. Whereas Bitcoin was designed to be extremely decentralized and thus not beholden to any national government or central bank, the eCNY, as a central bank digital currency, is the exact opposite in this regard. The PBoC will be able to retain control over the digital yuan, even opening up the potential for innovative monetary policy techniques such as introducing a depreciation rate to incentivize consumers to inject more money into the economy.

The exact timetable for the official rollout of the digital currency remains uncertain, with the scope of the pandemic possibility setting things back a bit. However, the scale continues to expand, with more than 10 million users now on the white list. More and more cities continue to be added to the pilot list, and the Winter Olympics presents an ideal scenario to test the system amidst hustle and bustle if things are able to proceed unimpeded by COVID-19. Even if that is not the case, look for the eCNY to continue to gain momentum and debut as a full-fledged payment option in the not-so-distant future.

The Diplomat

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