China attracted the attention of the global media and the crypto community by unveiling its CBDC- Digital Yuan, in September this year. While governments and financial institutions aim to improve efficiency and spur innovation in financial services through CBDCs (central bank digital currencies), it could be yet another means for the Chinese regime to enable government surveillance of the spending of common people. Unlike cryptocurrencies, CBDCs are controlled by governments, and thus, decentralization voices often criticize the concept.
Increasing Skepticism Around Digital Yuan
Growing skepticism could be one of the reasons behind the slow start of the Chinese CBDC. By 2021-end, the official eCNY app of the People’s Bank of China had 261 million users. Transactions worth 100 billion yuan (nearly $14 billion) had happened through the digital yuan by August 31. These numbers are modest given the enormous population size of China. However, Beijing expects these numbers to grow substantially in the coming years.
China is way ahead of the US and other European countries when it comes to launching a CBDC. It could be seen in connection with the attempt by non-western powers to de-dollarize the global economy for the existence of a multipolar world. It is an open secret that China advocates the use of blockchain technology while having some reservations about the use of cryptocurrencies. Aggressive marketing of its CBDC right from the beginning of the Olympics is a part of Beijing’s plan to turn the wave in favor of the digital Yuan. I would also want trade partners to replace $USD with the digital yuan for bilateral trades. Whether the digital Yuan will be able to reduce the dominance of $ the USD in the region, only time will tell.
Backstory
People’s Bank of China started working on the digital yuan in 2014. However, the project picked up pace only after 2019 when the digital yuan was positioned as a competitor to Libra cryptocurrency backed by Facebook (now Meta). According to the governor of China’s central bank, the digital yuan will replace the existing yuan in the coming years. Clearly, Beijing aims to completely digitize its economy, with total visibility over transactional footprints.
Interestingly, China has a national blockchain policy and the digital yuan is a part of that policy. To accelerate blockchain adoption, the Asian giant is aggressively working on developing IoT infrastructure to build smart cities.
The Launch of New Digital Yuan App
The People’s Bank of China launched a new version of the digital yuan app for IoS and android devices. The app is now available to users in 23 cities across China and further expansion is planned. In the 23 cities, including Beijing, Shanghai, and Shenzhen, users can pay for goods and services using e-CNY, the official app for digital yuan. Users can use any of the seven commercial banks and two online banks (all Chinese) to sign up on the app.
Tencent-owned messaging app and payment platform WeChat is among the first big players in the country to allow users to select e-CNY as a payment option to pay for services. To get perspective, WeChat has more than 750 million users in China. Therefore, the platform allowing payments through e-CNY could be a major boost for digital yuan usage in the country. At the same time, it could also be a differentiating factor for WeChat, which faces tough competition from other similar platforms.
The value of e-CNY is the same as that of the RMB (Chinese Yuan). Since the value of RMB is pegged to currency baskets like the China Foreign Exchange Trade System (CFETS) RMB Index, it is a fixed exchange rate. Therefore, e-CNY is going to be a highly stable digital currency. To encourage wider adoption, China allows foreign nationals located in any one of the 12 pilot cities to use the digital yuan through WeChat Pay or Alipay-affiliated online banks. ICBC, Agriculture Bank of China, Bank of China, China Construction Bank, Bank of Communications, Postal Savings Bank of China, and China Merchant’s Bank are the nine banks that are eligible to provide e-CNY. Besides these, WeBank (WeChat Pay) and MyBank (Alipay) are the two online banks that have the authority to provide e-CNY.
The Digital Yuan Comes With An Expiry Date
CBDCs are controlled by governments and this is an undeniable fact, at least for now. But the resurfacing of the news that the digital Yuan is programmed to have an expiry date has got the users worried. The fact reflects the extent to which Beijing aims to control the use of its digital currency.
According to the reports, the digital yuan is programmed in such a way that it can be made to expire if consumers fail to use it by a certain time. This essentially means that it is impossible to store the digital yuan. Unlike the physical currency that one can store in bank accounts, e-CNY has to be on move all the time. Since the authorities aim to completely replace the physical form of yuan with e-CNY, the concern rises even further.
Many believe that the move to have an expiry date could be a strategic move by China to have control over domestic consumption, with trade partners distancing themselves from Beijing following the issues like Taiwan and the Covid-19 pandemic. Either way, a clear picture can be drawn only after a wider rollout of e-CNY.
Final Word
Launching a CBDC is a great first step for the mainstream adoption of blockchain and similar technologies in financial services. But if the focus strays from enhancing efficiency and security, the basic idea of digitization goes for a toss. Financial experts need to dig deeper to understand the true motives of the People’s Bank of China. As far as e-CNY users are concerned, the Chinese government has already taken a decision on their behalf.