Download the file → Theories and Practice of exploring China's e-CNY.pdf

Introduction

Starting from a cryptographic experiment, Bitcoin and crypto-assets have gone too far, stealing the positive value of FinTech innovation while stablecoins entail promise and perils that we have to remain vigilant to and establish an appropriate supervision framework for accordingly. Sound money is a perpetual pursuit of central banks that always commit to providing public goods in the public interest. Meanwhile, the ongoing digitalization of our economy is leading to far-reaching changes in the mandates of central banks. Money and payment are no exception, and a digital form of central bank money for individuals and businesses to use in retail payments, the central bank digital currency (CBDC) is around the corner. There have never been more central banks who feel that: (i) unsupervised private networks could become a Wild West of financial fraud; and (ii) possible future payment solutions based on digitalization would most likely be CBDCs.

Motivations of CBDCs

CBDC as a new form of money and payment method could potentially facilitate enhancing resilience of the retail payment system, contribute to a better financial system, improving efficiency of the central bank payment system, and promoting financial inclusion of the society.

The first motivation is to improve the efficiency of the central bank payment system. Big Tech and fintech firms move into payment markets and digital payments via mobile phone provided by the private sector have gained ground. Concentrated yet fragmented market power may reduce the integration of different payment tools. As a trend in recent years, many central banks are improving their payment systems by building up fast payment systems, which widen the access to the payment system and incorporate more participants from different sectors. CBDC has a non-profit nature (Soderberg, 2022). By facilitating the integration among the payment markets, as well as adopting the latest technologies, CBDC with a low-fee structure could offer a digital form of payment that is cheaper to operate than legacy tools (Chen, 2022).

To demonstrate, e-CNY is one of the People’s Bank of China’s (PBC’s) latest efforts to improve the efficiency of the central bank payment system. E-CNY provides around the clock (24 x 7 x 365) services to the general public, which delivers the maximum level of accessibility to users. In addition, e-CNY realizes higher efficiency with the feature of settlement upon payment. Furthermore, e-CNY features in its high capability of 10,000 transactions per second, which enhance the concurrency performance of the central bank payment system. What’s more, the PBC joins hands with participants from different sectors including not only commercial banks and financial market institutions, but also payment service providers (PSPs), fintech companies, telecommunication operators. This could fully tap the comparative advantages of different stakeholders in payment product design, system development, use cases exploration, marketing, business processing as well as operation and maintenance, and build a market-driven e-CNY eco-system in a more efficient way.

The second motivation is to provide a backup or redundancy for the retail payment system. Ensuring the ability to pay under severe circumstances is vital for all jurisdictions. For some countries frequently hit by natural disasters, resilience is considered a key policy goal. In addition, countries with a highly digitalized payment sector may be concerned with disruption to digital services and concentration risks where there are only a few large operators. The failure of any of these could have serious consequences to the payments system. Similarly, in some advanced economies, central banks advocate the continued existence of cash, and their CBDCs could potentially serve as additional backup to existing forms of digital payments Therefore, CBDC could function as a backup to the existing digital payment solutions. (Bank of Canada, 2020; BIS, 2020; Carstens, 2022).

China has witnessed a leapfrogging of mobile payment development in which the private sector has played a conspicuous role in digitalizing financial plumbing and providing retail mobile payment services to the public. Yet, any financial or technical malfunction of the payment system could bring dread consequences to financial stability. Central banks are born to facilitate the mandate to continuously provide public products and services in payment and settlement especially retail payment that directly serves the broad public, so this is the duty of the PBC. E-CNY as a new form of legal tender could build upon the latest innovations and technologies in the payment sector. Moreover, with a dual-offline payment function, it has sufficient motivation and capacity to better serve the public interest even in extreme scenarios during unexpectedly adverse times.

The third motivation is to improve financial inclusion. Financial inclusion entails access to useful and affordable financial services that meet individual and business needs in a responsible and sustainable way, which is essential to the common goal of poverty reduction worldwide. While digitalization has resulted in material progress in financial inclusion globally, 1.7 billion people remain outside the formal financial system (Auer at el., 2022). In addition, with network effects, a few payment service providers may obtain a substantial market share and build “walled gardens” with exclusive user data in the payment sector (Gowrisankaran, Stavins, 2004). This may lead to elevated cost of services and to long-tail users like the disabled, the elderly, as well as the non-residents, who might encounter difficulties accessing local payment tools. Therefore, it is the obligation and responsibility for the central bank to cover those long-tail users. By developing new services with greater added value, facilitating fiscal policy implementation, CBDC could make digital payments more accessible and widen the access to financial services for countries that demand improving access to financial service.

The PBC has, for nearly two decades, sought to promote digital payments and to promote financial inclusion in all aspects, and e-CNY is such an effort.

Firstly, e-CNY enhances the accessibility of payment services. E-CNY is loosely-coupled with bank accounts, so a digital wallet could be delivered to an enduser without opening a traditional bank account as a prerequisite. E-CNY also features hardware wallets and wearable products such as e-ink displayed cards andsmart watches. The elderly, foreign visitors and non-residents can thus easily access the formal financial services in China, which could extend financial services.Moreover, the dual-offline payment function of e-CNY could be a new problemsolver for the remote domiciled as well as for situations with poor telecom network coverage. Furthermore, the PBC collaborates with authorized operators onbarrier-free designs to meet the needs of the people with disabilities. People withvisual impairment can access the e-CNY wallet with user-friendly interface andtailor-made functions.

Secondly, e-CNY lifts unnecessary costs of payment services and helps improve their affordability. The PBC does not charge authorized operators for exchange and circulation services, the operators do not charge individual users for the e-CNY related services either, which reduces the burden of the retail payment and improves the business environment as a whole.

Thirdly, e-CNY improves the retail payment efficiency. With loosely-coupled account linkage and value-based feature, the e-CNY system achieves “settlement upon payment”, which improves capital turnover efficiency for merchants andhelps relieve liquidity constraints imposed on small and medium-sized compa-nies.

Lastly, e-CNY could bolster market innovation and level the playing field which is vital to market structure and social welfare (Lovegrove, 2022). E-CNY is programmable in the sense that smart contracts can be loaded for complex payment functions such as conditional payments. Its programmability feature to gether with wallet matrix design, which will be explained below, can support innovations towards inclusive, green and sustainable finance. At the same time, with legal tender status, e-CNY is not constrained by the choice of service provider or payment tools, which could break institutional or tool-based barriers and harmonize fragmented payment markets.