Ep. 78: China’s Digital Currency Electronic Payment (DCEP) dreams
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Hey everyone, welcome back. Today's episode will be in an interview format as we talk to my good friend Xiaoyan on a topic that we've been trying to cover here on TechBuzzChina for a while, but just never got around to. And that topic is China's proposed national digital currency. Well, I guess it's technically called the DC slash EP initiative, which stands for digital currency and electronic payment.

but most people call it the digital yuan or digital RMB. Now, as some of you might be aware, I've actually been personally really involved early on in the Bitcoin cryptocurrency space.

Not much since a couple years ago, but I've always looked upon with fascination on the rise of Bitcoin and crypto because it was one of the first technologies that I saw rise concurrently, literally at almost the exact same time in both the US and China. And that just was not happening with a regular basis back then.

However, what's interesting to note is that the digital RMB is very much not that, as we'll make clear through the rest of this episode. There are some overlaps though, and now that there are real pilot programs on the ground, which we'll discuss, we're getting a better idea, although still very blurry, of what this digital RMB could accomplish.

And by the way, the Chinese government is also racing to launch digital RMB before Facebook's Libra project, which if you hadn't heard of, is this big permission blockchain-based payment system that was formally announced in June of last year. In China, big banks and fintech companies have already signed on to the digital RMB as partners, and a greater rollout seems imminent.

I'm not sure how I feel about its prospects, frankly, but at least after you listen to this episode and get a better idea for yourself, I'd be really curious what you think. So don't forget to reach out after this episode and let us know what you think. And if you're watching us from YouTube, definitely hit the subscribe button and comment below.

Hi, everyone. We are TechBuzzChina by Pandaily, powered by the Seneca Podcast Network by SubChina. We are bi-weekly podcasts focused on giving you a peek into what's buzzing within the tech community in China. We uncover and contextualize unique insights, perspectives, and takeaways on headline tech news that don't always make it into English language coverage, so you can be smarter about the world of China tech.

TechBuzz China is a part of Pandaily.com, an English language site that tells you everything about China's innovation. And I'm the creator and co-host, Ray Ma. Yinglu is my partner and our other co-host, but she's not joining us today. Don't forget to check out our other podcasts in the Seneca Network.

And as always, we're still looking for more reviews on Apple Podcasts for our show. Send either of us a screenshot of your review and we'll be so happy to gift you a free three-month subscription to our Extra Buzz newsletter. You can send me an email at rui at techbuzzchina.com. Several of you have already claimed this and we love it when you do. Thanks so much. So first of all, before we get started...

Let's state up front that these are all Yan's personal, personal opinions and do not represent those of her employer's past or present or future.

And Yan's actually worked at a few pretty interesting places, though, that are really relevant to this topic, which is why we have her on the show. So here we go. Please introduce yourself to our audience, Yan. Thank you very much, Ray. I'm Yan Xiao, and I'm currently a project lead focused on digital trade and digital payments here at the World Economic Forum. I'm based in San Francisco. Specifically, I focus on cross-border payments.

So I'm super interested in digital RMB. And thank you, Ray, for having me on the show to talk about it. I'm here to offer my personal opinions, and these do not represent those of the forum. And I hope that you find them useful. Yan's fintech experience, though, actually goes far beyond the WEF because before that, she was senior legal counsel at Ant Group for almost five years.

Ant Group, you know, the Chinese fintech company that owns Alipay, the billion user digital payments app, and whose IPO was just halted. A big fiasco and scandal. You should definitely go to our website, techbuzzchina.com, to read more about our coverage on that, as well as the company's business itself. But back to the digital yuan at hand. That is a really, really relevant experience for YAN.

And even before that, she was also a securities lawyer in China. And by the way, she's one of the very few people I know with both an American and Chinese legal licenses. That's pretty rare, actually, and really hard to do. But hey, it comes in really handy when you're looking for experts, right? To talk about something that the Chinese government is putting out. Because after all, there are huge regulatory and legal aspects to this topic.

So let's get started. First question to you, Yan. So how did all this all come about? Thank you, Ray, for the additional information on my background. Well, as you mentioned, China got started on this digital currency plan back in 2014. And in 2016, Zhou Xiaochuan, he is the governor of the People's Bank of China at that time. He gave an interview with Caixin and he formally announced a plan to issue digital RMB.

At the same time, Zhou Xiaochuan suggested that there's no clear timeline. And for a big country like China, it could take as long as 10 years to implement the plan. And during the same year, the PBOC actually formed a digital currency research center. Okay, I get it. The plan seems to be replacing the cash circulation entirely.

But why? Doesn't cash already have a very low usage in China? We talk about it a lot on this show. The power of Alipay and WeChat Pay, for example. Like you said, Alipay and WeChat Pay have pretty much dominated Chinese digital payments market. Close to 83% of the non-cash transactions were actually made through mobile payments in 2018. And these two players accounted for about 94% of that.

Given such a drastic shift in consumer behavior, PBOC actually saw the need to provide a digital alternative to cash. Digital RMB provides a public alternative to these private payment channels. Right now, some merchants may have exclusive agreements with one of those third-party payment companies, and they can reject acceptance of e-wallet payments of their competitors.

Digital RMB has the status of a legal tender, which means that the merchant cannot reject the acceptance of digital RMB. But the plan is never to replace cash entirely. Cash is still very important to people who have no access to smartphones or are not tech-savvy.

So some of those things you mentioned, Yan, such as forced exclusivity when it comes to signing, you know, which third-party payment provider you can accept, that's probably going to go away with the new draft antitrust regulations that were just announced. But let's note that it's definitely been a problem in the past, a thorn in many people's sides. It was super inconvenient to have to use one or the other and not just be able to use both.

But hey, I just don't feel that replacing cash is that sexy. There has to be like other benefits, right? There are several other motivations and objectives behind the PBOC's plan. Obviously, going digital means that the government will have direct access and more visibility over transaction data. A lot of that data is currently owned by the private payments companies.

Data collection could enable PBOC to do more analysis through big data and make more accurate decisions over monetary policies and to become more effective in combating financial crimes. And then there's also increased transaction efficiency. Having a digital RMB account means that the users can establish a direct relationship with PBOC without any intermediary.

Theoretically, it means anyone who has a digital RMB account could complete a peer-to-peer transaction without involving any bank or third-party payments. Also, digital RMB is expected to significantly reduce costs to banks in managing cash.

Just imagine all the human labor involved today to count coins and paper currency to move the money around and also to safeguard them. It could be quite costly for banks. Got it. I've read several news articles claiming that the issuance of digital RMB could eventually break up this duopoly that we have here of Alipay and WeChat Pay. And that makes absolute perfect sense to me.

By the way, I really suggest our listeners listen to our episode on Ant because we talked about this a little bit. The transactional data that's being used to power credit and lending, which is Ant's largest business, by the way, and it's going to be used to power more and more stuff down the road. But here in the U.S., there's no equivalent to these private payments companies because we rely mostly on credit cards.

So this proprietary transactional data that Ant has is just so powerful. And I get it, right? The Chinese government is probably thinking, hey, this country is digitizing super fast. There's so much information from all this digitization that I want. I mean, I need really in order to make good policy. So thanks, guys. Thanks, Alibaba and Tencent for doing that. But

I, as a regulatory organ, want the best access because I want to run this country, right? So please, let's find a way of working together where I do have more information.

But it's also not just about the power, the extraordinary power of these domestic companies, right? There are also foreign companies that the government is concerned about. I mean, none of them are big like Ant or WeChat yet, but they could be. Who knows?

Yeah, another big motivation behind digital RMB based on PBOC's press releases is to respond to potential competition posed by Facebook's Libra and other systemic stablecoins. Libra has a potential addressable market of at least 2.7 billion users globally. With this size of users and Facebook's global reach, the impact of Libra is very likely to go beyond sovereign.

One objective of issuing digital RMB is to improve the efficiency of use of fiat so that it will not be replaced by systemic stablecoins like Libra. Yep. And this is what I meant earlier about saying that even though, you know, I was really early in Bitcoin cryptocurrency and saw adoption go wild across the ocean in both the US and China.

At the end of the day, the Chinese government has made it very clear they don't want crypto or stable coins. So that's why I think in many ways, the people who are getting these two concepts confused, you really have to look at the underlying motivations of the government and why this is being pushed out and what are the benefits it's expected to bring. So back to the topic at hand.

Tell me more about how the digital RMB, how does it actually work compared to cash or mobile payments? Well, in some ways, it's quite similar to the existing mobile payments, actually. In the recent pilot, an account is tied to a person's phone number. Authentication will be conducted through sending messages to the person's phone.

One of the best features of Cache, of course, is that it's anonymous and the transactions are not traceable. PBOC claimed that they want to make digital RMB to have the same anonymous character as Cache. Some of the screenshots of the pilot showed that the merchant information won't be visible from the user end, but it is not clear how much data will actually be visible to PBOC or the banks that facilitate the transactions.

In China, one needs to provide identification to purchase a phone number. It means that the government may be able to trace the identity of a user unless that person is using someone else's phone. I don't know so far that the behavior of Chinese people who have adopted mobile payments just so quickly show me that there is this overall concern of...

you know, privacy over convenience. It does seem that convenience probably trumps everything. I mean, I myself don't carry cash unless I absolutely need to when I'm in China. And I've not been doing that for a very long time, maybe like a decade, right? The only cash I've seen recently is when I got red packets.

when I got married. And I doubt that will even survive for a few more years. Speaking of red packets, actually, that reminds me, that's how the government is distributing the money right now in these pilot programs, right? Well, the first few pilots that are reported by the public media started around April 2020.

They were actually for the employees of the Suzhou government to receive part of their salaries and benefits in digital RMB. But for the pilot this October, PBOC issued wrap packets to the residents in the Luohu district of Shenzhen. It was basically a lottery system. The total value of the wrap packets were about 10 million RMB, which is equal to 1.5 million US dollars.

Each rep packet is 200 RMB, which is about 30 US dollar. And one can choose to tie his or her existing bank accounts to the digital RMB app and upload more money into the digital RMB e-wallet from their bank accounts. This is just like linking their bank accounts to their Alipay or WeChat Pay accounts.

Well, one important observation I want to make is that the ultimate product may be very different from the recent pilot. Based on many speeches given by PBOC, they actually do not intend to issue digital RMB directly to consumers. Digital RMB will be distributed through banks and then to the general public, just like the distribution of cash today. Okay, so right now it's basically just another app, right?

And the pilot is expanding now to the other parts of the country. And there will be pilots in the big cities, Beijing, Shanghai, Shenzhen, and the surrounding areas. So that's okay. I mean, that sounds expected. But is there a rollout plan? What's the bigger plan here? The ultimate goal seems to be officially launch digital RMB or to test digital RMB on the larger scale.

and introducing the cross-border settlement and payments during the Winter Olympics in 2022, which is not far away from today. The next stage is actually to test the ability for the foreigners to use digital RMB in China by using their foreign phone numbers, and also to test expanding the use of digital RMB beyond China for cross-border payments.

However, both of these initiatives require coordination with central banks or payment supervisory authorities of foreign countries.

I personally really wonder how many foreigners who are just visiting, because you're just, you're talking about foreigners who have foreign phone numbers, right? So people like me who visit the country sometimes, what's their appetite for using the digital R&B? I mean, I'm personally okay with using Chinese apps, not really a problem, but

a lot of other people I know aren't nearly as comfortable. Indeed, I think privacy could be a big concern when it comes to any kind of digital currency issued by central banks. When it comes to foreign users, does the digital RMB fall within the jurisdiction of privacy laws of other countries? If so, what's the plan for compliance? This is all unclear at this stage.

So while we're on the subject of foreigners using the digital RMB, a ton of people have said that this digital RMB will enable the RMB to overtake the USD as the world's reserve currency. What do you think of that? That's a pretty big assumption and assertion. That's a great question. Whether or not RMB will take the place of US dollar depends on several factors.

When I think about currency, I think about them as both an asset and a tool for transactions. At the most recent IMF Annual Meeting, Powell, the chair of the Fed, actually pointed out that the reason why people choose one currency over the other is not because of the tech advancement. It's more because of the economy, the political system behind the currency, and a country's monetary policy.

And it also depends on how liquid such currency is. I just want to remind the listener that China still has pretty strict foreign exchange control. So RMB is not as liquid as US dollar at this stage. As for a tool for transactions, currency is actually a bit like a network. The more people use it, the higher value it has and the more people will want to continue to use it.

So today, about 80% of international trade is actually settled in US dollar. Basically, you can say that US dollar has a monopoly status when it comes to international payments. I don't think any currency is going to take over US dollar through tech advancement alone in the short run. So it does seem like it could be a real concern, but it also seems pretty far off, right?

I think it's one of those things. It's just easy to say and get headlines and coverage around because it would be such a big deal if it happened. But it's a really big if. I mean, so much needs to happen before that could happen, right? Right. A lot of cross-border coordination among governments and banks need to take place before digital RMB to take the global stage.

Also, digital RMB's valuation abroad isn't very clear. So right now the digital RMB will have the same value as onshore RMB. That's because unlike cryptocurrency, it is legal tender. As I have been saying, it is meant to be the same as cash, but just in a digital format. PBOC has actually put out a draft law for commons, which clearly states that RMB will take both physical and digital forms.

At present, there's a value gap between onshore RMB and offshore RMB, also known as CNH. If PBOC provides the circulation of digital RMB abroad, it will be very interesting to see how it will be valued. Well, hey, it's always good to think about the future, so I'm glad we're talking about it, but...

It does seem that there are probably a lot more motivations to do this domestically within China, and the international effects really are secondary, at least for now anyway. So tell us a bit more about how this impacts the domestic financial system, you know, the traditional banks, not the internet fintech companies that we were talking about earlier, but the traditional banking system. Sure. Sure.

So China already has a very efficient domestic settlement system. Having a digital currency is not going to make a huge impact on the existing settlement system. However, you may provide an alternative to existing settlement rails. Commercial banks may actually benefit quite a lot from digital RMB. It will reduce their costs of cash management over time and improve operational efficiency.

Commercial banks have started to develop payment tools within their existing apps, so the digital RMB can potentially help the commercial banks gain market share from the third-party payments companies. So instead of linking one's bank account with Alipay or WeChat Pay, one can spend digital RMB directly through their bank's apps. If digital RMB does end up gaining a lot of traction,

It may put banks on equal footing with third-party payments in terms of the access to consumer transaction data. But this depends on the ultimate design of digital RMB and how much details of the data will be available to banks. At this point, it is hard to predict how popular digital RMB will be. Third-party payments apps are super popular in China and they are also extremely efficient.

Since the digital RMB is just like cash, it will not accrue interest rates. So people may not have the incentive to hold digital RMB in large amounts. It will be interesting to see what kind of incentives will be out there to encourage people to use digital RMB. Yeah, I don't know. This is starting to sound less and less appealing to me, frankly.

But hey, I do understand that there's at least one more benefit that the PBOC has talked about trying to solve with the digital RMB that right now, at least in China, no third party mobile payment is trying to solve.

or maybe they just don't care about it. And then this concept is called financial inclusion. So yeah, a lot of us have heard of the words financial inclusion, but maybe it means something slightly different to us.

So explain to us what that means with regards to the PBOC and their vision for the digital RMB. Yeah, I think the payments companies, they also care about financial inclusion, but digital RMB does have some unique feature. So one of the key features is actually called dual offline, 双离线.

It allows transactions to take place between two phones that have no internet connection or cellular signals. Transactions will be processed through a near-field communications or Bluetooth technology. So this helps the very disadvantaged remote areas with no or limited internet reception. And you could also help during major disasters when internet connection or the cellular reception is affected.

I'm actually not so sure how this feature will work in the long run, because even if the transactions can take place where the internet is not present, the settlement needs to take place at some point, either between the banks or with PBOC, given that it is still a centralized ledger. So it's not clear how the settlement information will be transmitted and when it needs to be transmitted.

Okay, good to know that digital RMB will still work in a wildfire, but maybe not a total zombie apocalypse. What are some of the other things we should talk about? Like, we haven't really talked about the technical aspects of the currency as much, right? So what are some of the most notable things, you think? So first, the digital RMB features a direct claim on PBOC.

But the onboarding and real-time payment services are designed to be operated by intermediaries, or so-called authorized operators. So it's not like there's some single government entity doing everything related to the currency. The authorized operators at present include the four major banks of China. While the Pilot Digital RMBE wallet is designed and owned by PBOC, Digital Currency Research Center,

Each commercial bank also plans to embed in their own version of digital RMB e-wallet in their own apps.

The central bank will periodically receive and store a copy of the transactions submitted by banks. So if I were to use crypto terms to describe this, it's as if the e-wallet apps are processing transactions, but there are almost like independent exchanges, right? So they all report back to the centralized ledger, which...

It seems that the PBOC will have the only copy. Kind of, except we should emphasize that this is not all blockchain-based. The backbone of the digital RMB infrastructure is actually a mixed system with conventional database and distributed ledger technology, or DLT. PBOC has emphasized that DLT is not yet sufficiently mature for such a large-scale application.

To settle transactions, any system has to be able to accommodate 300,000 transactions per second to accommodate the volume of large retail transactions in China. WeChat Pay and Alipay can actually process way more TPS than that's required.

So PBOC doesn't really require intermediaries to use any specific infrastructure or any specific technological path. So tech neutrality is actually something PBOC keeps on emphasizing as well.

Okay, let's see. I don't really want to get into the weeds a lot more here, but I do think it's important to understand the technical merits of the digital RMB since it is, after all, a technology. And I know you've done a bunch of research on that. So tell us just a bit more. What are some of the other things we should be aware of? So another technical thing that I haven't talked about is the digital RMB's loosely coupled account design.

What it means is it's a value-based, semi-account-based and account-based hybrid payment instruments. It basically means that it's something called a tier KYC. So for example, Ray, if you go to open up an account, you need to provide your phone number, but you don't need to give your real name.

So your account will be subject to a transaction limit. If you want to have a higher limit, you will need to provide full identification, similar to what is required to open a bank account. So this will ensure that the users remain anonymous to each other, but allow the central bank to keep track of necessary data to implement prudent regulations and also crack down on money laundering and other criminal offenses.

Ooh, I have a question. What about smart contracts? I also saw that get thrown around a lot. Digital currencies, of course, can enable that. So is that part of the plan for the digital R&B? That's a super interesting question. So people have been talking about programmable payments enabled by smart contracts for a long time.

Programmable payments will allow distribution of social benefits and also the collection of tax payments automatically once certain conditions are triggered. So interestingly, based on Fan Yifei, who is the deputy governor of PBOC, PBOC seems to think that the design of the function of digital RMB should actually be as close as to cash as possible.

And using smart contract to direct the distribution of digital RMB may actually infringe on the individual privacy and affect the circulation of digital RMB. So based on those information, it seems like PBOC is not going to leverage smart contracts.

Okay, so maybe no smart contracts. Although, I mean, to me, that seems a little like it's defeating the purpose of releasing a digital currency. But hey, I'm not a regulator, so maybe I just haven't thought it through.

Anyway, I read also, here's another important point, that there were lots of other countries trying to do this as well, right? Could you give us some idea of what everyone else in the world is doing and thinking with regards to digital currencies like this? You know, ones specifically backed by sovereignty? Sure. Both the Bahamas and Cambodia have actually beat China in terms of launching central bank digital currency.

or you call it a CBDC. But most other countries are actually still at the research stage. Very few are conducting or have completed pilots. As for other big economies, the European Central Bank has recently announced a digital euro project.

So towards the middle of 2021, the European Central Bank will actually decide whether or not to launch a digital euro project. And this will be followed by an investigation phase on user requirements and service providers. The Bank of Canada has announced that it does not currently see a case for retail CBDC.

but it's conducting work on retail CBDC as a contingent plan in case cash use suddenly declines or a private digital currency is widely adopted. As for the U.S., Powell has mentioned that the U.S. is conducting a hypothetical CBDC experiment

but doesn't plan to launch one anytime soon. Okay, wow. I don't think I realized that there were so many countries doing this, like the Bahamas and Cambodia. Wow, good job. I did know that China was one of the farthest ahead. But for me, I'm in the US. Should I be worried that we aren't doing more here to push for a digital dollar? I want to echo Paul's talk at the IMF annual meeting.

This is not a race to be the first, right? This is more important to be right. So finally, if you want to learn more about CBDC, I suggest you follow Ashley Lindquist, my colleague from the blockchain team at the World Economic Forum.

She has put together a very comprehensive CBDC toolkit to help central banks make decisions on how to design CBDC. The paper itself is a product of consultations with several central banks. At present, we at the forum are actually working with a community of over 80 organizations to produce a series of papers on the governance of CBDC and stablecoins.

Okay, I think those are really most of my questions. I mean, it looks like the digital currency experiment is already well underway, regardless of whether or not you're paying attention. So there are still a lot of things to be worked out, of course, but experiments and pilots are just going everywhere. And I think in a few years, we'll have a much better idea of where all this is going to end up.

But I do want to highlight a few of the concerns that actually Yen and I talked about before we started recording that we just don't have very good answers for, but that you could keep in mind as you think about this topic, which is that right now there isn't a great answer to cybersecurity.

like specifically with the protocols around the digital R&B, who is responsible for what? We don't really know yet. These are all very small pilots and sort of closely held.

But we can hope that those are kind of edge cases and that for now, we don't have to over-worry about security. Although, I don't know, my opinion is that this is a currency, so those problems will come quickly. And they might come really quickly because at least in China, the internet companies are all jumping on as official partners. So, Didi, JD, Meituan, they have all announced that they're going to participate in the testing.

And these are companies with hundreds of millions of daily active users. So the distribution is going to be very fast if they start opening it to everyone on the platform.

And we'll be able to see for better or worse, like very quickly, if this is something that's going to be proven useful and a legitimate sort of replacement for some of the existing products from Alipay, WeChat, for example, or maybe it's not so attractive for your everyday consumer.

Anyway, that might happen really fast when those partners go live. So we'll know soon enough.

By the way, if you are a listener or viewer who's part of this pilot in China or maybe in Bahamas or Cambodia or any of these other places that are doing things, let us know. We're super curious as to your personal feedback. We actually tried to find someone, but it just didn't get them, you know, get anyone in time for the show.

Anyways, thank you so much, Yan, for all the detail and context that you've provided for our listeners and viewers on this topic. I really think, again, everyone, if you are curious about this, you should definitely follow her on LinkedIn. Search for Yan Xiao, that's Y-A-N-X-I-A-O at the World Economic Forum for more thoughts on digital payments and cross-border trade.

Okay, thanks, Ray. It's so great to be here. Digital currency is such an exciting space and so much is happening. We are publishing our concept notes on digital currency in January. So please stay tuned. Thanks, Yan. Thanks again, everyone. Thanks for listening. And don't forget to write us that review for your free ExtraBuzz subscription.

If you have any questions or comments, email us. We really enjoyed putting this together and we're always open to any comments or suggestions. You can find us on Twitter at ThePanDaily at TechBuzzChina. And my personal Twitter account is spelled R-U-I-M-A. TechBuzzChina by PanDaily is powered by the Seneca Podcast Network on SubChina.

Pandaily.com is an English language site that tells you everything about China's innovation. Our producers are Cai Weichen and Kaiser Guo. Thank you for listening.