[Author: Gianni Zhang]
China is pursuing global dominance in financial technology and the initial research on the digital currency can be traced back to the early 2010s. The main motivations behind e-CNY, the central bank digital currency (CBDC) developed under the project called Digital Currency/ Electronic Payment (DCEP), is to advance China’s technical and economic prowess, enhance payment efficiency, reduce the reliance on physical cash, strengthen CCP control over the Chinese population and counter U.S. financial influence around the globe.
e-CNY is the ‘world’s first cryptocurrency backed by Chinese bank reserves’ and it’s a digital version of the national currency, the yuan (CNY). Unlike decentralized cryptocurrencies like Bitcoin, e-CNY is issued and regulated by the central bank and its value is stable and guaranteed by the Chinese state. The digital yuan can be stored in a digital wallet, and transactions are conducted through mobile devices or other compatible platforms. Users can make payments without internet connection by scanning QR codes, enabling swift and contactless transactions. Differently from digital payments today, DCEP transactions will be authenticated immediately without relying on third-party services.
China’s push for DCEP comes from a twofold motivation: to promote domestic economic dynamism, but with greater state control, and to gain strategic positioning and influence globally. Over the last several years, mobile transactions accounted for four of every five payments in China, the use of mobile payment platforms has exploded in China while cash transactions have declined. The dominance of private mobile payment firms in China has given such companies an outsized role in retail commerce, making them indispensable to the economy. The People’s Bank of China (PBOC) is seeking a digital currency to harness the market share and technological innovation of private financial firms and to gain better access to information about the financial activities of Chinese consumers, enhance monetary policy and monitor illegal activity. Regarding safeguarding users privacy, PBOC officials have also stated that DCEP will have ‘controllable anonymity’, maintaining privacy among transacting parties.
Moreover, e-CNY could enable easier and more efficient cross-border transactions, which could enhance Chinese firms’ flexibility in global trade and potentially challenge the dominance of existing international payment systems. The chinese government aims to make the yuan the global reserve currency in the 21st century and the e-CNY’s success could lead to more use of the Chinese currency in international commerce.
The Central Bank of China is testing its Digital Currency Electronic Payment (DCEP) in several localities, including cities such as Shenzhen, Suzhou, Chengdu and Xunan with the involvement of four large state-owned banks and a number of state-owned banks and technology firms are building interfaces and distribution systems for the platform. The PBOC made e-CNY also available for wider use around the time of the 2022 Winter Olympics, hosted in Beijing and the e-CNY wallet app briefly topped the charts for the most downloaded app on Apple’s China App Store.
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