Since the launch of the digital yuan (e-CNY) pilot program in 2020, China has been expanding the scope of the project. According to the People's Bank of China (PBoC), the digital currency has expanded from the original "10+1" pilot area to 23 areas in 15 provinces and cities of the country. At the same time, Shenzhen, Suzhou, Xiong'an New Area, and Chengdu have canceled the whitelist restrictions and included Industrial Bank as the new designated operating institution. After the success of e-CNY in the Winter Olympics, its applications are gradually expanding. As an emerging fintech, e-CNY has not only attracted widespread attention from financial institutions, common people, and enterprises, but also from Chinese and foreign institutions where research is conducted on its development trends and prospects, as well as its impact on the economy, finance, and society.
Many studies, including those conducted by the PBoC, are quite optimistic about the development of e-CNY, stating that it will inject new vitality into the sinking of financial services and economic growth, and promote the internationalization of the Chinese yuan. However, while not denying the long-term positive impact and potential of digital currency on China, it should be readily acknowledged that there are numerous uncertainties as well. Many central banks and international institutions worldwide are in fact, rather cautious about the development of digital currencies. Central banks of G7 nations, together with the Bank for International Settlements (BIS) have established a joint research group on this, and in their report, it is mentioned that "a central bank should not compromise monetary or financial stability by issuing a CBDC (central bank digital currency)". Researchers at ANBOUND too have previously proposed that cautiousness and open-mindedness are crucial in the development and promotion of e-CNY, and that its impact on the economy and society needs to be prospectively studied to avoid unexpected factors.
The main obstacle to the development of the digital yuan at present is the lack of institutional construction and legal and regulatory systems. During the pilot period, exemptions can be made, but once it is used on a large scale, this would involve a series of issues such as information security, data security, personal privacy, financial supervision, and anti-money laundering. All these require basic legal system protection. Mu Changchun, Director of the Digital Currency Research Institute at the PBoC, recently mentioned that the next step will be to strengthen legislation and improve the top-level system design. In order to ensure the effective implementation of the e-CNY's controllable anonymity requirements, corresponding arrangements need to be deployed in the top-level system design. As a process is required for the improvement of laws and regulations, the pace of the e-CNY pilot will need to be controlled.
As far as the development trend of the digital yuan is concerned, its pilot in the retail sector has opened up market opportunities. However, it also faces many challenges in its promotion and development. As an alternative to cash, e-CNY does not conflict with the more popular mobile payment landscape. Instead, it is regarded as an opportunity and medium by banks and emerging technology companies for the entry of the payment market, with the belief that it will have an impact on the existing payment pattern. As for mobile payments, where Alipay and Tencent are dominant in China, the digital yuan will certainly challenge such an existing landscape. These institutions have invested in personnel and material resources in building the corresponding networks and mechanisms, and e-CNY will affect a large number of previous market investments, as its widespread popularity will naturally compete with major mobile payment institutions. That being said, in the eyes of consumers, the current e-CNY payment has no obvious advantages in terms of convenience compared with the existing mobile payment, therefore the large-scale market promotion of the digital currency still lacks practical motivation. If e-CNY is not promoted by the PBoC or government agencies through policies, its large-scale promotion and popularization in the future may not be exactly smooth.
The construction and marketing of the e-CNY system require numerous resources. Compared with the cost of cash issuance and circulation, the operating cost of the digital yuan does have its own advantages. Digital currency will not completely replace cash in the short term, and both digital and cash will still have to co-exist. This means that the PBoC and qualified issuers need to pay a higher price for this. The central bank has made it clear before that no fees will be charged for the use and payment of e-CNY, as the cost would be borne by the PBoC and commercial issuers. The development of digital wallets, along with the technical support, the data storage, and the transaction settlement system behind it, all require a lot of investment. These costs are difficult to supplement in the short term merely through the interest income generated by digital wallets (currently no interest is paid in e-CNY), and it may be difficult for ordinary institutions to bear them. This means that a large number of small and medium-sized financial institutions will be isolated and eliminated in the new market brought about by the digital currency, further raising the threshold for financial services. If this proceeds at a fast pace, it could cause great damage to the entire financial ecology.
Although the PBoC has repeatedly emphasized that the current attribute of the e-CNY is still to replace M0, once the use of the digital currency in the retail field continues to expand, it will inevitably penetrate and evolve in the direction of replacing M1 and M2. Some places now have begun to issue subsidies through the e-CNY, and water and electricity bills are payable through digital currency. In addition, there are also loans being issued in e-CNY. Wang Yongli, the former vice president of the Bank of China, pointed out that while digital currency may begin by replacing M0, it should never be limited to this, instead it should replace all possible currencies to achieve profound changes in the currency system. If it is only limited to replacing M0, its market competitiveness or the actual effect of input and output may face greater issues. Therefore, with the expansion of the e-CNY pilot, the development of this trend is likely not to be shifted by the will of the central bank.
In this regard, during the pilot process, in terms of currency circulation and financial supervision, the PBoC needs to consider credit creation of e-CNY, as well as conduct institutional planning and layout in advance to avoid problems similar to the spread of P2P risks. In the process of rapid popularization of mobile payment, there has been a great decline in cash. This is also one of the reasons why the regulators have to take measures to rectify and strengthen the control of payment. If the policy cannot be adjusted in time, then a large amount of money in the form of digital currency will be separated from monetary and financial supervision, which will bring risks to the financial stability and security of China.
Final analysis conclusion:
The pilot and promotion of e-CNY, the digital currency in China, has already been implemented. With this, its development in the economic, financial, and social fields sees great market potential. However, researchers at ANBOUND believe policymakers should remain cautious on this, and prioritize economic and financial stability. Regarding the possible problems and risks of the digital yuan, it would be crucial for relevant regulatory authorities to adopt a forward-looking outlook to avoid unpredictable negative impacts.
