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Last week, the People’s Bank of China published a white paper on its central bank digital currency, the digital yuan (often referred to as the e-CNY).
The 15-page report by the Working Group on E-CNY Research and Development of the People’s Bank of China was published both in Mandarin and English. We already knew the PBoC was exploring a two-tier, retail CBDC. The white paper sheds some light on its design features, but many questions remain unanswered.
Outside of China, some observers see the digital yuan as a tool to overtake the US dollar as the dominant currency. Others see the digital yuan as a predominantly domestic tool to curb the market power of domestic mobile payment platforms, pointing to the recent crackdown on digital payment groups such as Ant Financial and other fintech groups in China, such as Didi.
The white paper addresses both concerns. Most of the document focuses on the need for ‘safer, more inclusive’ and privacy-preserving digital payments options at home (the theme of data protection and privacy also shone brightly in the recent actions against Didi’s ride-hailing app). But it also addresses the fear of overseas governments that the digital yuan intends to dethrone the US dollar as the international currency of choice.
The digital currency ‘mainly serves domestic retail payment demands’, according to the whitepaper. The PBoC sees the digital yuan mainly as a substitute for cash, to co-exist with physical cash. It sees opportunities for the unbanked to ‘enjoy basic financial services’ provided via e-CNY wallet. Foreigners travelling to China ‘can open an e-CNY wallet to meet daily payment needs without opening a domestic bank account’. Moreover, the immediate settlement of e-CNY offers companies better cash flow and greater convenience, the paper argues.
After the recent crackdown on e-payments and other fintech companies, it is no surprise that the whitepaper also refers to a ‘second objective’ of the digital yuan to support ‘fair competition’, and efficiency and safety of retail payment services.
Although the digital yuan ‘complements’ existing e-payment tools, the whitepaper also makes clear how the former differs from the latter. It lists the digital yuan’s benefits compared to private digital payment tools: the e-CNY is legal tender, has intrinsic value, does not require bank accounts, supports off-line transactions and offers ‘managed anonymity’.
The third objective of the digital yuan, according to the white paper, touches on its international potential for cross-border payments. The white paper appears at pains here to address concerns abroad (particularly acute in the US) that the digital currency threatens the dominance of the US dollar or crowd out other currencies widely used in global financial markets.
It acknowledges that ‘RMB internationalization draws much attention.’ At the same time, the white paper tries to assuage fears that the digital yuan will come to dominate financial markets. It points out that the success of any currency depends on multiple complicated factors and the economic fundamentals of the issuing country. ‘The internationalization of a currency is a natural result of market selection,’ it adds.
The PBoC clearly does not rule out that the e-CNY may take on an important role in cross-border payments, but emphasizes that ‘though technically ready for cross-border use, e-CNY is still designed mainly for domestic retail payments at present.’ Notwithstanding this domestic focus, it wishes to explore cross-border use of its digital currency and work with other central banks on issues such as interoperability. Nevertheless, the white paper also sets out some basic rules of the game, stressing the need for ‘mutual respect to monetary sovereignty’ and other key concerns.
The e-CNY follows the principle of ‘anonymity for small value and traceable for high value,’ the whitepaper adds. It ‘collects less transaction information than traditional electronic payments’ and, internally, ‘the PBOC sets up a firewall for e-CNY-related information’.
Users will be able to open a wallet without having to provide identification, it appears: ‘[t]he least-privileged wallets can be opened without providing identities to reflect the principle of anonymity.’ Users can open sub-wallets to set payment caps and conditions, or personal information-protective functions.
What about the popular theme of programmability of digital money? Details are scant, but the white paper offers the teaser that ‘e-CNY obtains programmability from deploying smart contracts that don’t impair its monetary functions’, which it expects to facilitate ‘facilitate business model innovation’.
Will the digital yuan crowd out traditional bank deposits and increase the risk of bank runs in times of crisis? The PBoC details its mitigation measures, including the fact that the digital yuan will not pay interest (therefore decreasing the risk of undermining banks’ profitable business of attracting user deposits). To prevent bank runs, the programmability of the digital yuan allows caps to be imposed on different types of wallets.
The whitepaper does not clear up all questions on the digital yuan. For example, what does it mean to say that it is a ‘value-based, quasi-account-based and account-based hybrid payment instrument’ all at the same time? What does it mean to have a ‘variable face value’? What does it mean in practice that ‘under the quota management of the PBOC, the authorized operators open different types of digital wallets for customers based on the strength of customer personal information identification’?
As of 30 June 2021, almost 21 million personal e-CNY wallets had been opened and 3.5 million corporate wallets, according to the report. E-CNY transaction volumes rose to more than 70 million and their combined transaction value was RMB 34.5 billion, according to the white paper.
What’s next for the e-CNY? There are speculations that the digital yuan may be introduced during the 2022 Beijing Winter Olympics. The white paper makes clear the PBoC has worked on scenarios for using the e-CNY in the Olympics, since 2019. ‘Wearable devices were developed, such as gloves, badges and Olympic uniforms with payment functions,’ it added. This has prompted some US Senators to urge the US Olympic Committee to prevent US athletes from using the e-CNY wallets at the Olympics next year, citing surveillance concerns.
The white paper refuses to set a timeline for the official e-CNY launch, but it is clear that the digital yuan is far ahead of any other CBDC.