What Will Be the Impact of China’s State-Sponsored Digital Currency?


In April 2020, electronic Chinese yuan (e-CNY) pilot programs launched in four cities. The digital currency’s debut was the culmination of a six-year journey that began when China’s central bank, the People’s Bank of China (PBOC), announced its research into a “Digital Currency/Electronic Payment” system in 2014. Today, although many critical details of the payment system remain opaque or undecided, e-CNY pilots are rapidly accelerating in scope and size. In the coming years, the e-CNY will likely be deployed across China as part of Beijing’s focus on bolstering domestic financial security. The e-CNY could also be used to navigate international transactions around payment systems and networks that can be shut off to Chinese financial institutions serving U.S.-sanctioned entities.

The growth trajectory, financial stability implications, and geopolitical consequences of the e-CNY will depend on how the PBOC and other state organs resolve important structural details regarding its underlying network. One big question is whether Beijing will allow e-CNY transactions with U.S.-sanctioned entities such as affiliates of Iran’s Islamic Revolutionary Guard Corps. Central bankers should consider the trade-offs of state-sponsored digital currencies, and the U.S. national security community should watch the e-CNY’s rollout closely.

What is China’s e-CNY and how does it work?

As one PBOC official recently explained, the e-CNY is legal tender, meaning no entity in China can refuse it. Like paper Chinese currency—another form of legal tender—its issuance is facilitated by the PBOC. One e-CNY is worth the same as one yuan in paper currency, and each will be exchangeable with the other. Users can hold e-CNY in a mobile phone “e-wallet” app, and the ability to purchase e-CNY is currently set to be possible through China’s six large state-owned banks and the bank affiliates of Tencent and Ant Group, which control China’s two dominant digital retail payment platforms. Other types of wallets—including hardware wallets, essentially reusable prepaid cards that can either be separate from or part of a hardware device such as a mobile phone—that are not linked to a particular bank, may offer more privacy, and hold small amounts of e-CNY are currently being piloted.

Robert Greene

Nonresident Scholar
Asia Program and Cyber Policy Initiative

Robert Greene is a nonresident scholar at the Carnegie Endowment for International Peace’s Cyber Policy Initiative and Asia Program, focusing on Chinese financial sector trends and on topics at the nexus of cyberspace governance, global finance, and national security.

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The e-CNY network has two tiers. One tier, the lower tier, is (for now) exclusively made up of a few commercial banks that can facilitate the exchange of e-CNY with cash or bank deposits. The other tier is the PBOC. It controls the supply of e-CNY and manages e-CNY payments between the lower-tier banks.

The entire e-CNY network is, according to the China Banking Association’s chief economist, built upon the concept of “one coin, two databases, three centers” (一币,两库,三中心). “One coin” refers to the e-CNY unit of currency, which researchers at one major state-controlled financial institution explain is essentially an “encrypted digital string representing a specific amount that is guaranteed and signed by the central bank for sale.” The “two databases” refer to (1) the central bank’s ledger that keeps track of all e-CNY outstanding and (2) all the e-CNY ledgers maintained by the network’s lower tier either locally or on the same cloud used by the central bank.

The e-CNY network’s “three centers” are all reportedly PBOC entities. Details on these are scarce. Reportedly, the first is the certification center, which will keep a database that maps real identities against all digital wallet users; the second is the registration center, which will track e-CNY ownership and transactions; and the third is the big data analysis center, which the central bank will use to monitor payment flows for financial risks and detect illegal behaviors. According to former PBOC governor Zhou Xiaochuan, institutions that issue e-CNY will also bear some responsibility for compliance with payment rules and regulations, such as those related to China’s capital controls (regulations on the transfer or use of yuan outside of China) and sanctions (rules that prohibit companies from doing business with or serving particular persons).

The e-CNY network remains small scale—for now

The e-CNY seems to be primarily designed for domestic (within China) “retail payments”—meaning relatively small day-to-day payments involving consumers, businesses, or public authorities, which can be made either online or in person. In the future, however, e-CNY could be used for cross-border transactions, according to Wang Xin, a senior central bank official. Most e-CNY pilots thus far, however, have only involved relatively small domestic lottery giveaways or trial salary payments in e-CNY. This means that cross-border e-CNY transactions are nearly nonexistent and domestic e-CNY transactions are barely a crumb of China’s payments pie. For example, in November 2020, the central bank reported just 4 million e-CNY transactions. By comparison, in 2018, TenPay and Alipay—China’s two payment giants—reportedly processed 1.2 billion transactions (including WeChat Pay transactions) and 500 million transactions on average per day, respectively.

The digital yuan is different from China’s popular digital payment platforms

Importantly, Mu Changchun—director of the PBOC’s Digital Currency Research Institute, which has spearheaded the central bank’s digital currency research—recently explained that WeChat Pay and Alipay should be viewed separately from e-CNY. Tencent’s and Ant Group’s platforms allow for end users to make payments with existing forms of money: primarily personal deposit accounts at commercial banks, and also, indirectly, central bank reserves, which the PBOC requires be used to back all Alipay and WeChat Pay e-wallet balances.

Unlike these balances, however, the e-CNY is legal tender and is not linked to just one company’s platform, so it can be transferred across e-wallets maintained by various entities. And unlike consumer bank deposits, the e-CNY is not interest-bearing. This makes it a less desirable form of money in which to park savings, relative to government-insured, interest-bearing commercial bank deposits. In short, the e-CNY is designed to be a form of money used for payments, not to compete with bank deposits.

Beijing wants more people to use e-CNY within China

In the coming years, Beijing policymakers will likely pull levers to accelerate the use of e-CNY in China. Indeed, the Chinese Communist Party’s (CCP) fourteenth five-year plan calls for steadily increasing digital currency research and development, while the PBOC and numerous lower-level provincial and city governments are planning for broader e-CNY deployment.

A widespread domestic rollout of the e-CNY would align with Beijing’s push for “financial security” (金融安全). For China, this entails not just the detection and mitigation of financial risks but also the fusion of efforts by state security organs such as the Public Security Bureau with those of financial regulators. In 2019, General Secretary Xi Jinping endorsed enhancing financial security through “controlling people, watching money, tightening the system firewall” (管住人、看住钱、扎牢制度防火墙). Late 2020 research published by the PBOC links digital currency research with this objective. And although the ultimate surveillance capabilities of the e-CNY network have seemingly not yet been decided, as one expert recently observed, the e-CNY will inevitably result in “much greater surveillance of financial transactions than the current system.”

Indeed, central bank officials and the CCP’s Central Commission for Discipline Inspection and State Supervision Commission have noted that the e-CNY network’s structure will give the state greater ability to control and monitor financial flows. The e-CNY network could also allow Beijing to curb Ant Group’s and Tencent’s control of important payment rails (the digital infrastructure that moves money from one place to another); in the eyes of many Chinese policymakers, these companies have a track record of flouting government requests for financial data and ignoring regulations. Indeed, statements by Mu Changchun suggest that Beijing sees the e-CNY network as a “public option” payment rail. Its success could weaken dominant incumbent payment platforms, enabling policymakers to bring these platforms in closer alignment with Chinese financial…



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