As Chinese citizens stayed home over this Lunar New Year holiday amid concerns about the coronavirus, several major cities were busy doling out fresh handouts of China’s rapidly developing central bank digital currency. At the beginning of February, the municipal government of Beijing selected 50,000 applicants to receive about 200 RMB each in the digital currency, the latest test for the initiative, following similar programs in Shenzhen, Suzhou, Chengdu, and Xiong’an last year. Several more cities have made commitments to testing the technology in the next few months.
The medium term target for China’s digital currency rollout appears to be the 2022 Beijing Winter Olympics, where authorities hope to showcase the technology for the world to see. State media reported in December 2020 that tests of the digital currency at Olympic venues had already been completed. But as the technology matures and its rollout becomes more widespread, growing attention is being paid to its implications for the future of existing e-payment platforms in China, as well as the country’s sprawling surveillance state.
In late October 2020, the head of China’s digital currency program told the public that the currency would not compete with WeChat Pay and Alipay, the dominant privately run e-payment platforms in China. “They don’t belong in the same dimension. WeChat and Alipay are wallets, while the digital yuan is the money in the wallet,” said Ma Changchun, according to the South China Morning Post.
But the outlook for private e-payment platforms, and particularly Alipay, managed by the embattled Ant Group, has changed significantly since then. After halting Ant Group’s IPO at the eleventh hour in November 2020, Chinese regulators introduced a series of new measures to rein in Ant’s personal lending programs, including introducing significantly higher minimum capital requirements for fintech firms. Regulators urged Ant to return to its mainstay business of e-payments.
But the path forward for China’s digital currency seems set to undercut that business too. In an extensive report on the e-yuan, Financial Times’ James Kynge and Sun Yu reported that authorities seem to be aiming to popularize their digital currency at the expense of existing platforms:
A sense that the popularisation of the digital renminbi could come at the expense of Alipay and WeChat Pay is reinforced by Beijing’s messaging through state media coverage. In a dispatch from the streets of Beijing during Chinese new year, a reporter from CCTV, the official television station, said using the e-yuan was “more convenient” than other payments systems.
“The digital currency will deal a blow to Alipay and WeChat as it could replace them,” says a director at a large state-owned bank. “It is likely that the government will use administrative power to promote the use of digital renminbi to undermine the monopoly on consumer data held by the technology firms.”
In fact, such administrative powers are inherent to the e-yuan itself. Because the digital renminbi is legal tender, no merchant can refuse to accept it and will, therefore, be obliged to install e-yuan terminals and payments systems after the currency is formally launched. The same is not the case for Alipay and WeChat Pay, which merchants are at liberty to refuse. [Source]
Kynge and Yu report that other benefits of using the e-yuan and the central bank’s app include its capacity for offline payments, using what the state calls “dual offline technology.” Users may also prefer an alternative to big-tech managed e-payment platforms amid growing popular concern about privacy and user data in China. CNBC’s Eustance Huang reported on comments from analyst Martin Chorzempa, who predicted that the new digital currency would provide a major challenge to big tech companies:
“A lot of people talk about (the digital yuan) being a driver of renminbi internationalization,” Chorzempa, senior fellow at PIIE, told CNBC’s “Street Signs Asia” on Wednesday. “I think they have to beat Alipay and WeChat Pay in China before, I think, that they can make a dent in the U.S. dollar.”
“It’s going to be essentially the central bank versus the big tech companies and that’s going to be quite interesting to watch,” he said.
[…] Chorzempa said one of the main reasons spurring the push for the digital yuan was the desire for a state backed and controlled alternative to incumbent giants such as the Alibaba-affiliated Alipay app and Tencent’s Wechat Pay, which currently process about 95% of digital payments in China. [Source]
Another, perhaps more major worry about the digital currency is its implications for citizens’ privacy inside China’s burgeoning surveillance system. An extensive report by Yaya Fanusie and Emily Jin for the Center for New American Security, a D.C. think tank, examined the implications of the digital currency for surveillance:
DCEP is likely to be a boon for CCP surveillance in the economy and for government interference in the lives of Chinese citizens. DCEP transactions will contain precise data about users and their financial activity, all easily accessible to the PBOC. The central bank—as the registrar and verifier of the digital currency—will likely be able to cut off access to DCEP funds in order to punish or coerce any user. The CCP has already begun to increase its punitive powers within the central bank, running an internal team from the Central Commission for Discipline Inspection (CCDI) within the PBOC that investigates graft. DCEP would help the CCP solidify authoritarian control and crackdowns on dissident groups.
[…] PBOC officials have described DCEP’s user privacy as “controllable anonymity” since at least early 2018. Yao later elaborated on the term, explaining it as a “front-end voluntary, back-end real name” system. Users will be able to reveal their identities to counterparties or not, but will have to register their real names in order to use the currency in most cases. The only way to use a wallet without providing identity information will be for small transactions, according to Mu. This means that the PBOC will place transaction limits on truly anonymous wallets and probably use transaction monitoring to guard against users trying to disguise a large transaction by breaking it up into smaller ones below the limits. To transact above the limits, users will have to register. Thus, the PBOC will be able to “achieve traceability under certain conditions and ensure that regulatory technologies such as big data analysis are useful.” [Source]
Worries about the capacity for the state to monitor and follow every financial transaction using the digital currency will likely ring alarms beyond China’s border, as Beijing aims to use the digital currency as a vehicle for RMB internationalization. CDT has previously written about the global ramifications of an international RMB. That plan took another major step this month, after China’s central bank established a partnership with SWIFT, the global system for cross-border payments, through its digital currency research center.
But other economies in Asia are also catching up in the race to establish their own national e-currencies. Nikkei Asia’s Kentaro Iwamoto reported this week on the development of e-currencies in Asia, and possible implications of the rollout of China’s digital currency in countries involved in the Belt and Road Initiative:
Despite China’s status as the world’s second-largest economy, the yuan or renminbi lags far behind other international currencies. It accounted for 2.13% of global foreign reserves in the third quarter of 2020, according to the International Monetary Fund. Its share of global payments was just 1.88% in December, according to SWIFT, a provider of secure financial messaging services.
But [Kazumasa Miyazawa president of Japanese blockchain startup Soramitsu, which is helping Cambodia set up an e-currency called the Bakong], said that “the digital yuan could go into developing nations in Asia, the Middle East and Africa.” He also noted that China is encouraging local and foreign banks to use its Cross-border Interbank Payment System, a competitor to SWIFT, which could increase the ratio of yuan in international transactions.
Analysts at Singapore’s DBS Bank highlighted the digital yuan’s potential in Africa in a recent report, pointing out that Huawei Technologies’ new smartphones have a built-in digital yuan wallet.
“With the preinstalled digital wallet, e-RMB going forward could be exported overseas more efficiently,” the analysts wrote, using the abbreviation for renminbi. “Africa, for instance, is well-positioned for the rapid adoption of the digital yuan” thanks to China’s strength in the continent’s consumer device markets. [Source]