Peoples Bank of China

CBDC tests are proceeding toward deployment, as Chinese internet, fintech and e-commerce giants are leading the digital yuan vanguard.

While key central bank figures in the West like Jerome Powell and Christine Lagarde appear to be procrastinating on the subject of central bank digital currencies, China continues to make significant progress.

China’s digital currency electronic payment project, or DCEP, helmed by the country’s central bank, continues to draw significant private sector participation. From tech giants, to e-commerce conglomerates, many of the major private sector firms are playing pivotal roles in the quest to create the digital yuan.

DCEP testing also continues to expand, with trial runs via lotteries taking place across several cities. Banks like the Agricultural Bank and the Industrial Commercial Bank have taken a leading role 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. Indeed, the digital yuan project has been touted as Beijing’s response to curb the duopoly held by both companies.

These rumblings also intensified in late 2020 after Jack Ma, co-founder of Alibaba, seemingly withdrew from the public eye in the aftermath of comments labeled as criticism directed at Chinese financial regulators. In an address delivered at the Bund Finance Summit held in Shanghai back in October 2020, the billionaire accused Beijing of stifling innovation while characterizing Chinese banks as pawn shops.

Ant Group as a holding firm, which has been on the cusp of a $37 billion initial public offering, saw that its IPO plans halted suddenly. Commentators at the time put Ma’s disappearance and the IPO imbroglio down to comments made during the event.

However, while Ant Group is still under intense regulatory scrutiny in China, reports have emerged that a financial holding company has been involved in the digital yuan project with the central bank since 2017. Indeed, this revelation means Ma’s firm and the People’s Bank of China (PBoC) have been collaborating on what is now known as the DCEP years before the PBoC officially debuted the DCEP in 2020.

Furthermore, the Ant Group-backed MYbank is also one of the financial institutions tipped to offer the digital yuan. The PBoC’s digital currency research division has been using 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 noted history with blockchain with the financial institution, filing the third-highest number of patents related to the novel technology back in 2019.

Commenting on the likelihood of the DCEP competing with established electronic payment rails in China, Yifan He, CEO of Red Date Technology, a major infrastructure provider on the country’s Blockchain Service Network told Cointelegraph:

“I don't really think that the purpose of DCEP is to compete with Alipay/WeChat pay. If the government really wants to muzzle them, they have a lot of methods. The vision of DCEP is much bigger.”

Between fintech and the banking gatekeepers

From lotteries to shopping festivals, Chinese banks have been moving to promote the digital yuan for retail adoption across several cities in the country. These trial runs seem to focus on getting user adoption for the DCEP, and having live interaction with wallets and payment platforms.

However, an argument could be made that the digital yuan needs more adoption in the business-to-business payment arena, so it could function as a full-fledged CBDC companion to the existing fiat as envisioned by the central bank. E-commerce giant JD.com is one of the few companies to test the DCEP for B2B payments.

Earlier in April, the online retailer revealed that it was already utilizing the digital yuan for B2B payments to partner firms, as well for cross-bank settlements. These types of use cases likely push the boundaries of the DCEP in its current form to an actual CBDC.

JD.com also revealed that it was already using the digital yuan for salary payments since January. The company has sponsored a few DCEP trials, contributing about $4.6 million for the second public lottery held in Suzhou.

The company is also another example of a significant role being played by the private sector in fostering greater DCEP adoption. In December, the online retail giant began accepting the digital yuan as a payment method on its platform, receiving almost 20,000 DCEP-funded orders in the week following its announcement at the time.

Like Tencent and Ant Group, JD.com is also involved in the developmental backend of the DCEP matrix. In fact, the company’s fintech division, JD Technology and Digital Currency Research Institute, has been a development partner with the PBoC since September 2020.

According to Wang Peng, an associate research fellow at the Chongyang Institute for Financial Studies of Renmin University of China, it is in the best interest of these companies to partner with the PBoC in developing the digital yuan. However, the trend also likely elevates the position of fintech firms in China’s financial services arena, possibly to the detriment of commercial banks and their gatekeeping role in the industry.

Central bankers, while commenting on CBDCs, often talk about how sovereign digital currencies could cause the disintermediation of commercial banks. For Jason Blink, CEO of a digital bank EQIBank, the situation is simply part of the relentless march of the current ongoing progress in the global financial space, as he told Cointelegraph:

“Deployment of blockchain across numerous asset classes will inevitably go viral as incumbent processes and services become increasingly obsolete. Blockchain technology in large-scale capital markets, banking, exchanges, lending and other financial services is gaining extraordinary momentum, as stakeholders seek to eliminate inefficient processes across the entire lifecycle.”

According to Blink, digital processes, like decentralized ledger technology, will ultimately become the backbone of not just banking, but the entire global capital market infrastructure. However, Yifan maintains that the DCEP will not signal the end of banks in China, telling Cointelegraph:

“In the foreseeable future, all DCEP activities must go through commercial banks, based on the current design and structure. So, it has very little impact on commercial banks. But in the long run, when PBoC allows third parties to open DCEP accounts or access DCEP accounts anywhere in the world, then it will have a huge impact on Chinese commercial banks.”

For Yifan, the digital yuan will undoubtedly force commercial banks to rethink their business models, especially amid competition from fintech firms. “But I don't think they will kill them, because the main functions of commercial banks are to provide services to end-users,” Yifan added.

The rest of the world playing catchup

The digital yuan might not be a full-fledged CBDC yet, 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 plans 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 weighing the need to commence 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 participants in the study clamoring for privacy as the most important feature of a European CBDC.

Indeed, privacy concerns are common in the CBDC conversation, with consumers wary of the increased visibility of their monetary activities under a national digital currency paradigm. Already, there are fears across Macau’s casino scene that a fully traceable digital yuan might signal the death knell for junket operators.

ECB President Christine Lagarde has previously stated that it could take Europe four years to develop a digital euro, which by that time, China’s DCEP could have at least achieved domestic penetration. According to Monica Singer of Ethereum infrastructure developer ConsenSys, the ECB and other global central banks risk losing ground to China and fintech firms if they remain indecisive about CBDCs.

Meanwhile, U.S. Federal Reserve Chairman Jerome Powell remains resolute in the position that the U.S. will not enter into a CBDC race with China. According to Powell, the Fed is more concerned with getting it right than rushing to play catch up with China.

In the United Kingdom, the central bank has recently established a CBDC task force. The Bank of England has also reportedly begun hiring CBDC experts for its internal exploratory team focused on CBDCs.