In a discussion paper released by the Asian Development Bank in February 2022, it came out in no ambiguous terms that the People’s Bank of China is developing a Central Bank Digital Currency, also called the digital Yuan (e-CNY).
By that time, the country had already witnessed the emergence of significant fintech players like the Ant Group and Tencent, which started with digital payments and eventually expanded into investment products and loans.
CBDC is one of the central topics of discussion during this year's World Economic Forum in Davos. With more than 100 countries exploring CBDCs, it is vital to understand the motives and scope of their progress. Could CBDCs increase resilience towards global risks of high inflation, low growth, and the emergence of a high-debt economy, and what are the dynamics with regard to the crypto economy?
In this context, we take a closer look at China’s Digital Currency Project.
What is the genesis of the CBDC in China? How far has it come? What are some of the features that make China’s CBDC unique or special?
Four driving factors led to the People’s Bank of China thinking of introducing a digital Yuan (e-CNY), the digital version of the legacy Yuan, the digital RMB, or the digital Renminbi.
(i) Equip the population with a form of digital cash.
(ii) Make retail payment services efficient and safe while encouraging fair competition.
(iii) Make cross-border payments efficient.
(iv) Finally, in alignment with the philosophy of the ‘digital,’ the PBC believed it could positively impact financial inclusion, which is vital in such a highly populated country as China.
Whether the digital Yuan has lived up to its promises needs further scrutiny. Before that, let’s look into the time trajectory line.
The People’s Republic of China started researching CBDCs in 2014 under the Digital Currency/Electronic Payment (DC/EP) project. The on-ground development commenced in 2017. It was the time when the Digital Currency Research Institute also started functioning with Yao Qian as its director.
Multiple distribution and circulation decisions were adopted in the subsequent years. Then in 2018, the Deputy Governor of the PBC, Fan Yifei, declared centralizing the digital Yuan and adopting a two-tier distribution model.
The Governor of the PBC, Yi Gang, announced replacing a component of the country’s cash with the digital Yuan without affecting the country’s money supply wings such as bank deposits and private payment platforms.
The pilot program began in October 2020 in the four regions of Shenzhen, Suzhou, Chengdu, and Xi’an.
The PBC gifted 10 million digital Yuan to 50,000 Shenzhen residents. They could spend these gifted currencies at more than 3,300 businesses. It took a week for the population of 50,000 people to spend 8.8 million digital Yuan in more than 62,000 transactions.
Did all these efforts lead to people proactively opting for CBDC? According to numbers gathered till 30th June 2021, Chinese people had opened nearly 21 million personal wallets and more than 3.5 million corporate wallets. Digital Yuan transactions went nearly up to 71 million, resulting in a value of almost 5 billion US$.
It is still too early to judge whether CBDC has taken off the way it should have in China. However, there has been noticeable growth, with the total number of digital Yuan transactions hitting the number 360 million and the total transaction value crossing the mark of 100 billion Yuan by August 31st, 2022, close to 15 billion US$. In essence, digital Yuan transaction value took a little more than a year to grow three times.
Fifteen provinces and cities have come under the digital Yuan pilot program. The number of stores that accept digital Yuan payments in the country is around 6 million. According to the government, the pilots ran without any setbacks, covering a range of application scenarios in Wholesale, Retail, Catering, Travel, Education, Medical Care, and Public Services.
A People’s Bank of China official recently stated that the growth in digital Yuan usage was “not ideal.” Xie Ping, a former director-general of research, spoke of a few reasons why the CBDC did not get as much success as it should have.
Xie believed that for digital currency to become successful, it must expand its usability. Having the digital Yuan only as a substitute for cash does not make it compelling enough for users to go beyond the traditional payment mechanisms of cash, bank cards, and third-party payment apps like Alipay.
Whether the Digital Yuan will go beyond being just a means of consumption is yet to be seen.
Presently cryptocurrencies, considered hard to control, are banned in China while the country is doubling down on its digital currency.
Interestingly, NFTs, called digital collectibles within China, are seeing a surge in sales, recording almost $4.8 billion in sales in 2022. The country is also launching a national NFT marketplace, which may contribute to higher growth. A strong indicator that the Government of China prefers digital assets it can control.
Recent reports also indicate that the Asian powerhouse may be treating Hong Kong as its playground, considering its recent affinity to digital assets. If that is true, China may roll back its crypto ban in the future, but that may not happen anytime soon, as the country is pushing for higher usage of its digital yuan.
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