While key central bankers in the West like Jerome Powell and Christine Lagarde seem hesitant on the subject of central bank digital currencies, China continues to make significant strides.
China’s digital currency electronic payments project, or DCEP, led by the country’s central bank continues to attract significant private sector participation. From tech giants to e-commerce conglomerates, many of the big private sector companies are playing a pivotal role in the quest for the digital yuan.
DCEP testing will also continue to expand, with test runs taking place via lotteries in multiple cities. Banks such as Agricultural Bank and Industrial Commercial Bank have taken the lead in these DCEP pilot protocols, creating user wallets for consumers.
Tencent and Ant Group are major digital yuan players
Amid the many DCEP pilots across China, the absence of Ant Group and Tencent, operators of the country’s two largest electronic payment platforms — AliPay and WeChat Pay — caused significant speculation. In fact, the digital yuan project has been touted as Beijing’s answer to curbing the duopoly between the two companies.
Those rumblings also intensified in late 2020 after Jack Ma, co-founder of Alibaba, appeared to have withdrawn from the public eye following comments that were described as criticizing China’s financial regulators. In a speech at the Bund Finance Summit in Shanghai in October 2020, the billionaire accused Beijing of stifling innovation while calling Chinese banks pawnshops.
Ant Group, the holding company poised for a $37 billion IPO, saw its IPO plans suddenly halted. Commentators at the time attributed Ma’s disappearance and IPO confusion to comments made during the event.
While Ant Group is still under intense regulatory scrutiny in China, reports have surfaced that a financial holding company has been involved in the digital yuan project with the central bank since 2017. In fact, this revelation means Ma’s company and the People’s Bank of China (PBoC) have been working on what is now known as the DCEP for years before the PBoC formally launched the DCEP in 2020.
In addition, Ant Group-backed MYbank is also one of the financial institutions that received the tip to offer the digital yuan. PBoC’s digital currency research department used Ant’s mobile app development environment to create smartphone apps for the DCEP.
Back in February, MyBank and Tencent-backed WeBank were also confirmed as participants in expanded digital yuan trials. WeBank, arguably China’s largest digital bank with over 200 million customers, has a remarkable history with blockchain at the financial institution, having filed the third-highest number of patents related to the novel technology back in 2019.
Commenting on the likelihood of DCEP competing with established e-payment rails in China, Yifan He, CEO of Red Date Technology, a major infrastructure provider in the country’s blockchain services network, told Cointelegraph:
“I don’t really think DCEP’s purpose is to compete with Alipay/WeChat payments. If the government really wants to muzzle them, they have many methods. DCEP’s vision is much bigger.”
Between fintech and the bank gatekeepers
From lotteries to shopping festivals, Chinese banks have tried to promote the retail digital yuan in several cities across the country. These test runs appear to be focused on getting user adoption for the DCEP and having live interaction with wallets and payment platforms.
However, it could be argued that the digital yuan needs more adoption in the business-to-business payments space, so it could act as a full-fledged CBDC companion to existing fiat, as envisioned by the central bank. E-commerce giant JD.com is one of the few companies testing DCEP for B2B payments.
At the beginning of April, the online retailer announced that it was already using the digital yuan for B2B payments to partner companies and for cross-bank settlements. These types of use cases are likely to push the boundaries of the DCEP in its current form into an actual CBDC.
JD.com also announced that it has been using the digital yuan for salary payments since January. The company has sponsored some DCEP studies and contributed about US$4.6 million to the second public lottery in Suzhou.
The company is also another example of a significant role the private sector is playing in driving greater adoption of DCEP. In December, the online retail giant began accepting the digital yuan as a payment method on its platform, receiving nearly 20,000 DCEP-funded orders in the week following its then-announcement.
Like Tencent and Ant Group, JD.com is also involved in the development backend of the DCEP matrix. In fact, the company’s fintech arm, JD Technology and Digital Currency Research Institute, has been a development partner of the PBoC since September 2020.
According to Wang Peng, an associate research fellow at Renmin University of China’s Chongyang Institute for Financial Studies, it is in these companies’ best interests to work with the PBoC to develop the digital yuan. However, the trend is also likely to strengthen the position of fintech companies in China’s financial services industry, potentially to the detriment of commercial banks and their gatekeeper role in the industry.
While commenting on CBDCs, central bankers often talk about how sovereign digital currencies could lead to commercial bank disintermediation. For Jason Blink, CEO of digital bank EQIBank, the situation is simply part of the relentless march of current advances in the global financial space, as he told Cointelegraph:
“The use of blockchain in numerous asset classes will inevitably go viral as established processes and services become increasingly obsolete. Blockchain technology in major capital markets, banks, exchanges, credit and other financial services is gaining tremendous momentum as stakeholders seek to eliminate inefficient processes across the lifecycle.”
According to Blink, digital processes like decentralized ledger technology will eventually become the backbone not only of banking, but of the entire global capital markets infrastructure. However, Yifan claims that DCEP will not signal the end of banking in China, told Cointelegraph:
“In the foreseeable future, based on the current design and structure, all DCEP activities will have to go through commercial banks. So it has very little impact on commercial banks. But in the long term, if the PBoC allows third parties to open or access DCEP accounts anywhere in the world, it will have a huge impact on Chinese commercial banks.”
For Yifan, the digital yuan will undoubtedly force commercial banks to reconsider their business models, especially in the face of competition from fintech companies. “But I don’t think they will kill them because the main role of commercial banks is to provide services to end users,” Yifan added.
The rest of the world is catching up
The digital yuan may not yet be fully-fledged CBDC, but China’s accelerated progress in developing a sovereign digital currency arguably puts it ahead of other major economies. There are even reports that the country is planning to allow foreign athletes and other visitors to use the digital yuan during the Beijing 2022 Winter Olympics.
While China is in accelerated testing phases, the European Central Bank is still considering the need to start a formal study on CBDCs. Recently, the ECB published the results of a public consultation on a possible digital euro, with almost half of the study participants calling for data protection to be the most important feature of a European CBDC.
In fact, privacy concerns are rife in the CBDC talk as consumers mistrust the increased visibility of their monetary activities under a national digital currency paradigm. There are already fears in Macau’s casino scene that a fully traceable digital yuan could spell the end for junket operators.
ECB President Christine Lagarde has previously stated that it could take Europe four years to develop a digital euro, by which time China’s DCEP could have at least achieved domestic penetration. According to Monica Singer of Ethereum infrastructure developer ConsenSys, if the ECB and other global central banks remain undecided on CBDCs, they risk losing ground to China and fintech companies.
Meanwhile, Federal Reserve Chair Jerome Powell remains resolute in his position that the US will not enter a CBDC race with China. According to Powell, the Fed is more concerned with getting things right than rushing to catch up with China.
In the UK, the central bank recently set up a CBDC task force. The Bank of England has also reportedly started hiring CBDC experts for its in-house discovery team focused on CBDCs.
Comments are closed.