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The Launch of China’s Digital Currency
China’s Digital Currency Push
After more than a year’s pilot runs, China’s digital currency, known as e-CNY, made its international debut for global users during the Winter Olympics. E-CNY (previously known as DCEP, or Digital Currency Electronic Payment) is a form of central bank digital currency (CBDC) and the People’s Bank of China has been working on it since 2014. More and more use cases are arising by including commercial banks and internet companies (such as Tencent’s WeBank pay and Alibaba’s MyBank) in a dual-tier system.
At the current stage, e-CNY is designed as a fiat currency to replace cash and coins already in circulation, and it is 100% backed by reserves in the central bank with no interest accrual. Some of the interesting features of e-CNY include: 1) it can be both account based and value based (hence you do not need to have a bank account to use e-CNY); 2) it has low costs (no charge on exchange and circulation); 3) it has managed anonymity (as e-CNY follows the principle of “anonymity for small value and traceable for high value”); 4) it does not require internet access; and 5) it is programmable (i.e. it has smart contract capability such as token function, prefund issues, etc.).
The rollout of e-CNY has been going on well on the merchant side. As of December 2021, there had been 8.1 million outlets that use e-CNY and 261 million retail e-CNY wallets had been opened, representing nearly 20% of China’s population. (CLSA, February 2022) Having said that, most consumers in China are still more familiar with Alipay and WeChat pay. With more features such as “red pockets” and “cash coupon” being rolled out, and more promotions from banks in the future, we believe the adoption rate of e-CNY could gradually pick up.
In the near term, the e-CNY rollout will lead to upgrade demand not just for various banking facilities and devices (i.e. ATM, VTM, STM, etc.), but also for banks’ clearing systems and e-wallets, as well as software for DCEP operators and partners.
Central Banks Worldwide Develop Digital Currencies
The Chinese government has very strong incentives to promote its digital currency as policy makers can monitor fund flows more closely and thus make monetary policy and other important policies more effective. In addition, e-CNY helps enforce regulations such as anti-money laundering and anti-tax evasion.
Though the central bank has no plan nor timetable to test e-CNY in cross-border payments at present, it allowed foreigners attending the Winter Olympics in Beijing to use e-CNY.
Many other major central banks are also exploring central bank digital currencies. The European Central Bank launched a digital euro project in July 2021, and is in a two-year "investigation phase" to study the digital euro's design, feasibility and impact on the market. The Federal Reserve also released a paper on digital dollars in January 2022.
A 2021 survey of 65 central banks by the Bank for International Settlements showed that 86% of them were developing digital currencies. Some 14% of the banks said they were running pilot projects, while 60% were experimenting at the proof-of-concept stage (DW, Deutsche Bank, January 2022). Central banks collectively representing a fifth of the world’s population are likely to issue a general purpose CBDC in the next three years (CLSA, February 2022).
With central banks in major countries speeding up pilot projects of their CBDCs, we expect the development of digital currencies to accelerate in the coming years when more mature infrastructure, compliance and regulations are in place.
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