China turns up pace on CBDC release, tests infrastructure prior to adoption

The COVID-19 crisis has done little to dampen China’s interest in becoming the first major economy to distribute a central bank digital currency. Quite the contrary, its digital currency/electronic payment project appears to be picking up speed. 

In the Shenzhen region, for example, 100,000 local citizens this month received for free a total of $31 million digital yuan via lottery, and now residents can use ATMs to convert digital yuan to cash on a test basis.

Meanwhile, the Postal Savings Bank of China has reportedly developed physical wallet cards on which to store digital yuan, something useful for the elderly who aren’t always comfortable with electronic currency. The government, which seems to be covering all eventualities, recently enlisted payment-platform Alipay in the construction of digital yuan systems in the Shanghai area as well.

Why all the rush?

Kevin Desouza, professor of business, technology and strategy at Queensland University of Technology, told Cointelegraph: “China is accelerating its pace of development of its CBDC. Simply put, they see this as a critical competitive advantage in the digital economy.” Given the nature of China’s markets and governance and its determination to gain a “first-mover” advantage in the CBDC race, “we can expect China to triple down on this effort going forward.”

Eswar Prasad, a professor of economics at Cornell University and senior fellow at the Brookings Institution, told Cointelegraph: “China has made significant progress in establishing and refining the design and conceptual frameworks for its CBDC” and has brought “the shift from physical to digital versions of central bank retail money that much closer to reality.”

When fully rolled out, the digital yuan will be used as an M0 currency — i.e., as cash in circulation like coins and banknotes, according to an official of the Peoples Bank of China. The preparation has been extensive, with 2020 pilot tests in four regions — Shenzhen, Suzhou, Xiong’an and Chengdu, plus the Winter Olympics scene — while the 2021 agenda calls for tests in five regions — Shanghai, Hainan, Changsha, Qingdao, Dalian and Xi’an. There has been an emphasis on usability in these test areas, according to the Beijing Review.

A key phrase from the report stated that “both mobile phones were offline.” China’s digital yuan will not require an internet connection, something viewed as critical in a land where many remote areas still have no or spotty internet access.

Challenges like interoperability and privacy remain

China has not solved all the problems attached to a CBDC, though. “There are still important issues to be tackled in terms of scalability, interoperability and transactional privacy for users of the DC/EP,” as Prasad told Cointelegraph.

Yu Xiong, international associate dean at Surrey University and chair of business analytics at Surrey Business School, told Cointelegraph: “There will still be some technical issues remaining before full rollout, however, the main issues have already been addressed in the test period.” The matter of usability has been largely settled.

Chinese consumers are flexible when it comes to applying new payment methods, and the digital yuan wallet is expected to be similar to those already being widely used in China on non-bank payment platforms like Alipay or WeChat Pay, explained Xiong. Users will download digital yuan wallets to their smartphones where the digital currency can be stored. “All the major online trade and communication platforms will follow, so the infrastructure will not be an issue,” he added.

Crucially, a user won’t have to open a bank account to get started — just provide a unique form of identification, like a driver’s license or a cell phone number. A digital yuan would be an event of some social importance for China, suggested Xiong, because it could bring many poor people into the financial system and alleviate poverty.

Monetary surveillance

Elsewhere, China is already mostly cashless, so a digital yuan isn’t going to bring dramatic changes to the retail sector. But as for the reasons beyond social equity for why China is so committed to a digital yuan, Desouza told Cointelegraph:

“The reason for China’s investment in this is to increase the credibility and universality of their currency. Today, the yuan is not seen as a major currency. However, in the future, they see the CBDC taking a leadership position in the digital currency market.”

There’s a practical reason, too. Desouza suggested that a CBDC would give the central bank an enhanced ability to surveil and control the flow of money between the citizens. Indeed, a digital yuan appears to be a double-edged sword. Enabling the government to track the money flow might be useful for clamping down on corruption, as Xiong noted, and would also “help the government to monitor the finance system and reduce the chance of a financial crisis.”

A digital yuan could reduce certain investment risks, for instance, when the government continued to build mammoth residential complexes in so-called “ghost” cities — i.e., under-occupied developments.

But perhaps these advantages come at the price of sacrificing privacy and even some basic freedoms. Political critics or dissenters could more easily be denied access to the finance system if all money flows can be tracked — as they could with a CBDC.

During recent protests in Hong Kong, demonstrators waited in long lines to purchase subway tickets with cash — fearing that, otherwise, the authorities might trace them to the demonstration site and take punitive action, Marta Belcher, a Ropes & Gray attorney, told Fortune magazine, adding: “A cashless society is a surveillance society.”

Sidharth Sogani, CEO of crypto and blockchain research firm Crebaco, even sees a Bitcoin (BTC) aspect in China’s drive toward a digital yuan. He believes that China has not taken to decentralized crypto, however, the software, hardware and mining industries were allowed to grow. “Currently, a majority of Bitcoin is mined in China — so I see an ulterior motive behind being aggressive with their CBDC. Maybe it would enable China to trade BTC more efficiently,” he told Cointelegraph.

Can it be replicated elsewhere?

At this point, the PBoC has accumulated heaps of data about how consumers would actually use a digital currency. The central bank provided employees in a Shanghai hospital with the aforementioned plastic cards holding digital yuan to order meals in the staff restaurant, for example; and at the start of January, Alipay was testing the digital yuan in a Shanghai shopping center, placing signs in beverage shops where consumers could employ the usual Alipay scan code function — only here selecting a yuan pay option. Will other countries now draw on China’s experience as they build their CBDCs?

A DC/EP-type project could be reproduced elsewhere, said Xiong, but it would take time to gain acceptance, as with mobile payments. China can adapt to the new payment method quickly because its banks and e-commerce platforms can be easily synchronized. As Xiong outlined for Cointelegraph:

“But most of the Western countries could not enforce a new policy/technology smoothly. So, the DC/EP model will be carried out first in China, and other countries will have to gradually grow the users and infrastructure, which will take time.”

Is the U.S. dithering?

Does it really matter if China comes to market first among large economies with a digital currency? The Bahamas, a small West Indies nation, launched the first CBDC available to all residents in October — so China won’t be the first country overall. “In CBDCs, it will have the first-mover advantage,” said Sogani. “If a U.S. [digital] dollar comes after two years, they may lose the market.”

Others aren’t so sure. “It will hardly put a dent in the dollar’s status as the dominant global reserve currency,” Prasad told Cointelegraph. “The dollar’s strengths lie not just in the depth and liquidity of U.S. financial markets but also the institutional framework that underpins the currency’s status as a safe haven.”

Neha Narula, director of the Digital Currency Initiative at MIT Media Lab, noted in November: “They will be able to see all of the payments that people are making and collect information about all of those payments. That is — [it] might make sense in China. But I don’t think that makes sense in the United States... And we have to think about how to architect the system so that isn’t the case.”

In sum, even if China is already a mostly-cashless society, especially in its cities, it continues to methodically roll out a central bank digital currency on a scale not previously seen, both for internal reasons — like broader social equity and the ability to exert more financial and political control — but also because it realizes, arguably, that global leadership entails having a world-class currency and the DC/EP project provides the fastest way to get there.