China: eCNY Meant to Replace Domestic Cash

Interoperability with current digital payment systems, a domestic retail focus, and co-existence with physical cash are some of the key themes of China’s Central Bank Digital Currency, the eCNY, according to a new white paper released by the People’s Bank of China. 

Since China’s eCNY was thrust into the spotlight in 2019, a lot has been said about the project with some calling it “China’s bitcoin”.

Although bitcoin is mentioned in the report, as a prelude when introducing the current era of digital payments, there’s no correlation between the two in the report.

In fact, if anything, the opposite: “Given their lack of intrinsic value, acute price fluctuations, low trading efficiencies and huge energy consumption, they can hardly serve as currencies used in daily economic activities. In addition, cryptocurrencies are mostly speculative instruments, and therefore pose potential risks to financial security and social stability,” the report read.

Reality check

The reality is a bit more bland. China’s central bank knows that cash usage is declining because physical cash is bulky and not as convenient as digital payment via a mobile phone. But at the same time, relying on intermediaries like digital wallets means that control of cash — and the economy — is now in the hands of big tech.

As a result, People’s Bank of China officials are more concerned about stablecoins than bitcoin. 

Stablecoins are digitized money tied to fiat currency. The People’s Bank of China is watching the rise of stablecoins and seeing parallels to the popularity of mobile payments apps like Alipay — which boasts 676 million monthly active users. 

Both involve using a digital representation of money that’s stored in a commercial bank account. While the growth of stablecoins is impressive, coming in at a market cap of $108 billion with volume of $45 trillion, they are relegated to one part of the economy. Stablecoins are primarily used for digital assets trading, and occasionally for remittances, but they are firewalled to one section. 

Mobile payments in China, however, effectively are retail payments. According to a People’s Bank of China survey cited in the white paper, in 2019 during a measured period 66% of retail transactions occurred by mobile payments while 7% occurred via card.

In total, cash was passed over by 46% of people who chose a combination of mobile payments, card or stored value card instead. 

From the end of 2016 to the end of 2020, cash in circulation (M0) only rose from RMB 6.83 trillion in 2016 to RMB 8.43 trillion. This hasn’t kept pace with the supply of commercial bank money (M2) which ended 2020 at just over RMB 220 trillion, from around 150 trillion in 2016. 

In a 2019 column, China-based VC and Coindesk columnist Dovey Wan pointed out that the supply of M2 money has led to an annual growth rate of this money supply at around 15%, faster than the year-on-year GDP growth rate of 10%. This is mostly due to the digitization of currency because of the popularity of mobile payments like Alipay, and other drivers like commercial bank loans as well as P2P lending.

“To get ahead of it requires a new financial system altogether. That’s what’s intended with the Digital RMB, a project that’s conceived of as a means of reasserting monetary control in the interests of financial stability,” she wrote. 

Of course mobile wallets like Alipay are not going away anytime soon. It’s just that the payment rails will be replaced. 

“eCNY will provide the public with a new interoperable way of payment, which will further diversify payment instruments and make the payment system more efficient and safer. The Chinese authorities support coordinated development of various payment methods,” the People’s Bank of China paper reads.

Not challenging the US dollar

A popular narrative is that the success of the eCNY will finally give the Chinese currency enough liquidity to take on the US dollar in the global economy. But this isn’t something that the eCNY is intended to do, according to the paper.

Instead, People’s Bank of China delineates that there are two versions of the eCNY: one, issued to commercial banks for large-value settlement, and another issued for retail transactions. And one to replace the US dollar? Not quite. 

“The internationalization of a currency is a natural result of market selection. The international status of a country’s currency depends on its economic fundamentals and the depth, efficiency and openness of its financial markets,” the paper reads. “Though technically ready for cross-border use, eCNY is still designed mainly for domestic retail payments at present.”

But despite some thinking that the eCNY will instantly mean the internationalization of China’s currency, it seems the People’s Bank of China has acknowledged the barriers that its strict control of the CNY’s liquidity place on its potential for internationalization — namely the capital controls of currency leaving the country, and a pegged exchange rate.

Crypto investor Tim Draper pointed out during a podcast that a digital version of a fiat currency is still one and the same, subjected to political whims and guided by “the politician on the top.”  

“I wouldn’t want to take Chinese digital currency anymore than I’d want to take renminbi,” Draper has been quoted as saying. “If you digitize [the] renminbi, you are still stuck with most of the problems that you have with current political currency, with fiat currency.”