Will China’s Central Bank Digital Currency ever have its Olympic moment?
The Winter Olympics in Beijing were not just a showcase for the world’s best athletes. The event was also an international testing ground for China’s new digital currency – the digital yuan (or e-CNY) – and reinvigorated the interest in its Central Bank Digital Currency (CBDC) plans. Rather than focusing on the functional payment aspects of China’s CBDC, in this analysis we review the key dynamics influencing its adoption.
Over the past year, the race for CBDCs has intensified. There are now 87 countries that are exploring a CBDC in some shape or form. China’s central bank, the People’s Bank of China (PBoC), has been leading the development of a digital currency for quite some time now. In fact, China is poised to further widen the gap, as the PBoC is currently running large-scale pilots in 12 major Chinese cities and regions, plus the digital yuan was presented to the world during the Winter Olympics. In contrast, most countries are still at the research stage with their CBDC, including the USA with the Digital Dollar and Europe with the Digital Euro.
China first began exploring the concept of a sovereign digital currency back in 2014, following the success of mobile payment and digital wallet solutions like WeChat and Alipay. With the first small-scale trials having taken place in May 2020, it has been piloting its digital yuan for almost two years now.
This year, though, China has been stepping up its efforts to create a digital currency. At the beginning of the year, the PBoC released a pilot edition of a mobile wallet application for its digital yuan. More recently, China seized the opportunity to showcase its digital yuan on a global stage and assess its foreign appeal during the Winter Olympics 2022 in Beijing. Throughout the event, international athletes and teams were able to use the digital yuan as one of three available payment methods – besides cash and Visa cards – in and around the Olympic Village.
Even though very few overseas visitors were able to attend the Winter Olympics due to COVID-19 restrictions, which limited the opportunity to test the digital yuan’s foreign appeal on a significant scale, its availability at the event still attracted a lot of international attention. It also triggered some concerns and criticism from the global community related to privacy and domestic competition. Although more than US$300,000 worth of the digital currency was spent daily according to the PBoC, it did not result in the widespread adoption that many were hoping for. This begs the question: which hurdles does China need to overcome to achieve widespread adoption of the digital yuan?
Chinese consumers have little reason to switch to using the digital yuan
Domestically, the PBoC faces fierce competition from the two dominant mobile payment systems in China: Tencent’s WeChat Pay, and Alipay (which is run by an Alibaba affiliate called Ant Group). These widely adopted payment systems already offer a fully digital payment experience for Chinese citizens. Therefore, there is little reason for them to download and switch to the PBoC’s mobile wallet application in order to use the digital yuan, especially since it doesn’t offer an improvement in terms of the user experience.
It was recently announced that, just like Alipay, Tencent will now also support the digital yuan in its WeChat Pay app. This will create a possibility to bypass some of the friction in the user experience and provide a large user base with access to the digital yuan. Nonetheless, as of now, there are few incentives for consumers and merchants to use the digital yuan instead of the existing payment methods, as it does not provide a superior user experience relative to these existing solutions.
China could mandate adoption of the digital yuan
If the adoption of the digital yuan were to be left entirely up to the market, it would face significant hurdles such as the user experience friction as described above. However, we should also consider the fact that the digital yuan is run by the Chinese central bank, so the typical private-sector rules do not fully apply. The Chinese government could mandate companies to accept and use the digital yuan, leaving these companies no choice. Also, many of China’s largest organisations are state-owned and therefore may also be mandated to use the digital yuan. Such actions would not only lead to domestic adoption of the digital currency, but could also impact on non-Chinese companies that operate in China or conduct business with Chinese vendors and suppliers.
One reason why China could likely go down this path of mandated adoption is that a broadly used digital yuan would provide the Chinese government with rich data on the flow of money via the Chinese central bank, resulting in very granular insights into economic activity. On top of that, the digital yuan will be ‘programmable’, providing additional levers for more granular fiscal and monetary policies. This programmability attribute could allow the attachment of expiration dates to individual currency units, restrictions on spending possibilities associated with specific units and individuals, or freezing of digital currency linked to criminal activity and non-compliance. Therefore, the digital yuan may be more about data and control than it is about currency.
Privacy issues could be the single biggest impediment to adoption of the digital yuan
The idea of the Chinese government collecting data across the country’s entire payment flow may not go down well with democratic nations that have strict privacy laws. China’s central bank has expressed plans for what it calls “controllable anonymity” with the digital yuan, meaning that transacting parties can remain private, while the central bank can still observe and monitor transactions.
This has created concerns within the global community that the digital yuan may be used as a tool to closely monitor the financial activities of Chinese citizens and even international citizens. In this context, some foreign athletes at the Winter Olympics were explicitly forbidden by their country’s officials to use the digital yuan due to privacy concerns. Chinese citizens and the Chinese private sector have expressed similar concerns. Addressing these concerns and building trust among digital yuan users that their data is private and well-protected will be crucial for widespread adoption, both on a domestic level and on an international scale.
Regardless of the outcome, China’s leading efforts in the development of a sovereign digital currency is pushing other central banks around the globe to keep pace. As a result, a cashless world with digital currencies seems like an almost inevitable future.
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