Case Stuyd: e-CNY (China)

Background

The Chinese government insists that digital currencies should only be issued by governments and central banks. e-CNY is a currency created and sanctioned by the Chinese Government. It is not a third-party stablecoin such as Tether’s cryptocurrency token CNHT which is also pegged to the RMB in a 1:1 ratio. e-CNY is the only legal digital currency in China (cryptocurrencies such as Bitcoin are not legal tender in China). Its development started in 2014 with the establishment of a research institute dedicated to digital currencies and looking at how to improve the Chinese RMB system with blockchain technology.

China has made it explicitly clear that its National Digital Currency is not for speculation. Mu Changchun, Head of the People’s Bank of China digital currency institute made it as:

A digital form of the RMB and that the currency is not for speculation. It is different to Bitcoin or stable tokens.

The significance of e-CNY is that it’s designed as a replacement for the Reserve Money (M0) system, cutting back the cost and friction of bank transfers. It is not listed on cryptocurrency exchanges and will not be for speculation of value. It is suggested that e-CNY will alleviate the risks of offline paper money transactions such as anonymous counterfeiting, money laundering, and illegal financing. This is because regulators can better monitor digital currency transactions, which some consider will greatly improve financial and monetary supervision. e-CNY can also reduce the costs involved in maintaining and recycling banknotes and coins.

Furthermore, the issuance of e-CNY is conducive to promoting the internationalization of the RMB and reshaping the current cross-border payment system. This is because prior to the RMB Cross-Border Inter-Bank Payments System (CIPS) going live in early October 2015, RMB cross-border clearing and settlement was mainly done through CHIPS (Clearing House Interbank Payments System) or SWIFT (Society for Worldwide Interbank Financial Telecommunication).

Special features of e-CNY

It is a centralized digital currency that runs on a centralized private network – the Central Bank of China, The People's Bank of China (PBOC), has complete access and control of the currency. This is a huge contrast to Bitcoin, which has an open decentralized network where there is no centralized leader. In the case with e-CNY, the Central bank of China has the ability to create or destroy e-CNY.

According to Official Sina Blockchain, e-CNY will have NFC-based payment options that don’t require devices to be online during the transfer. This will be poised as a direct replacement of paper money, as e-CNY will be usable in areas without internet coverage. In addition, e-CNY doesn’t require the mobile device to be bound to a bank account – meaning the unbanked population will also have access to the digital currency.

With e-CNY’s tap payment feature people can transfer money simply by tapping two phones together, without the use of the Internet. So e-CNY is not exactly like blockchain either, rather it is their own variant.

Two-tiered system: wholesale, retail

Former Vice-chair of the PBOC’s National Council for Social Security Fund announced on 22nd June 2020 that China had already completed the backend infrastructure of e-CNY. And the issuance and distribution of e-CNY will be based on a two-tiered system.

The first tier would be transactions between the PBoC and intermediaries. These intermediaries would be financial institutions (e.g. the 4 major state-owned banks i.e. China Construction Bank, the Agricultural Bank of China, Bank of China, and the Industrial and Commercial Bank of China) and non-financial institutions such as Alibaba, Tencent, and UnionPay. Here, the PBOC would issue e-CNY to the intermediaries.

The second tier would be between the above-mentioned intermediaries and participants in the retail market such as companies (e.g. retail stores) and individuals. In this tier, the intermediaries that have received e-CNY will distribute it to the retail participants so that it would circulate through the market e.g. through people buying things at stores, etc.

The main difference in the issuance and distribution of e-CNY compared to traditional cash however is the fact that e-CNY would be transferred through electronic wallets, rather than bank accounts.

China has already completed the backend infrastructure of e-CNY, as well as the setting of parameters, research, and development into its functions, joint debugging testing, etc. although ongoing testing is still required.

According to netizens that obtained screenshots from the closed beta, the e-CNY wallet will support several major functions including: digital asset exchange, wallet management, ability to look up past transactions. Other functions include payment via QR code, remittances, and mobile payments.

Other pictures circulating online appear to be of the Bank of China’s e-CNY wallet. As can be seen from the image, the wallet will allow the currency to be sent, received, converted, etc., as well as a simple and clear interface showing the user’s transaction history.

Last but not least, the central government has mandated that all merchants who accepted digital payments (such as Apple Pay, AliPay, and WeChat) pay must accept e-CNY. This will give e-CNY a large nationwide acceptance in China, with every merchant obligated to participate or face a potential loss of their business license.