China has made a head start in the global race to research and launch a full digital currency, with some civil servants in a few pilot cities including Shenzhen, Suzhou and Chengdu getting half their pay in the form of the e-RMB.
Internal testing and trials spearheaded by the People’s Bank of China (PBoC) have long been underway, with the central bank aiming for a wider roll-out for athletes, spectators and journalists at the 2022 Winter Olympics, when Beijing and the many towns near the venues will go fully paperless in all transactions.
The PBoC’s top-down push for the e-RMB is not intended to give China’s omnipresent WeChat Pay and AliPay a good run for their money or even supersede the duopoly of the two digital payment platforms, the cash cows of Chinese tech behemoths Tencent and Alibaba.
Rather, the e-RMB is part of Beijing’s imperative to safeguard currency sovereignty and promote the Chinese yuan beyond its borders.
When Facebook unveiled its Libra blockchain digital currency, otherwise known as the “Facebook coin,” in June 2019 to promote its stable, low inflation and freely-convertible cryptocurrency for worldwide transactions and transfers, the move piqued the interest of PBoC chief Yi Gang.
While the project has faced criticism and objections since its conception, Yi reportedly instructed the bank’s digital currency division to expedite the process, building on the groundwork laid by China’s ubiquitous penetration of mobile payment services.
With central banks across the United States, Japan and Europe scrambling to formulate strategies for currency sovereignty since the advent of digital money, China’s e-RMB had been six years in the making since former governor Zhou Xiaochuan first broached the idea of launching a digitalized legal tender.
But Facebook’s Libra project sped up the birth of the e-RMB as the PBoC pooled its resources and fast-tracked reviews and approvals, while keeping guard on Beijing’s currency sovereignty.
Mu Changchun, chief of the PBoC’s Digital Currency Research Institute, was quoted as saying that the centralized processing platform for e-RMB being tested would help China shed its over-reliance on the US-dominated Society for Worldwide Interbank Financial Telecommunication (SWIFT) and the New York-based Clearing House Interbank Payments System (CHIPS) for the settlement of cross-boundary RMB transactions.
The speedy trial of the digital redback and its dedicated processing and clearing platform sits well with Beijing’s emphasis on self-reliance to prevent the US from cashing in on its financial and technical dominance, now that ties between the two powers are at an all-time low.
Beijing is concerned about a possible worst-case scenario with its banks and dealers shut out of the SWIFT and CHIPS transactions. Iranian and North Korean businesses and traders are already denied access to the two systems as part of Washington’s sanctions against the two countries.
Yet it remains to be seen if the e-RMB can gain a wider use overseas and accelerate the internationalization of the yuan.
Xinhua has suggested that Beijing can encourage Chinese lenders and state-owned enterprises to use the e-RMB for yuan-denominated international e-commerce and purchases, like those already in place with Russia, Pakistan and other traditional allies and participants of the Belt and Road Initiative.
The news agency also cited observers as saying that Beijing could consider making acceptance of the e-RMB a prerequisite for future pecuniary aid and economic and financial largesse for African and Latin American countries to help central banks there sign up to China’s e-RMB settlement platform and popularize the digital currency in emerging markets.
Nonetheless, other than the fundamental obstacle of capital account control and the inability for the yuan to float, other features of e-RMB including transparency and traceability will also hinder its international adoption.
Chinese state media say the e-RMB will be fully traceable with real-name registration for authorities to monitor and track the flow of money.
For instance, casino operators in Macau, who rely on hordes of high-rollers from mainland China for the lion’s share of their income, now fear for their business outlook if the e-RMB takes hold.
Their VIP patrons from the mainland, many of whom prefer to stay low-key and are very protective of privacy and details of how the money is marshaled across the border, may find it hard to park their capital in offshore havens when all accounts and transactions become transparent and when the cross-boundary flow of money is surveiled.
Xu Yuan, a senior researcher with the Peking University’s Digital Finance Research Institute, said following the launch of the digital yuan, there would be no transaction that regulatory authorities would not be able to see and check.
This means money laundering, tax evasion or other related offenses would face more crackdowns but the digital yuan may also put people’s privacy and legit business secrets on the line.
There are also questions about whether the PBoC’s systems are impregnable against hacking and stealing of e-RMB.
Despite its first-mover status, the PBoC has come down hard on the trading of other digital currencies and banned commercial banks from accepting cryptocurrencies to safeguard financial stability. The way the e-RMB is managed on an unified platform is also strikingly different from bitcoin’s decentralized storage and distribution approach.