Given the novelty of the digital yuan and the accompanying app, there are still many unknowns to navigate.
Already at the beginning of 2022, China increased its efforts to further develop and sponsor the digital currency by expanding the previous limited pilot program to reach a total of 23 cities across the country, where users can freely download the app and use it as an alternative payment method.
Big e-commerce, food delivery and online payment players such as Tencent and Alibaba, also announced the integration of the digital yuan in their payment options.
But there are still many challenges facing the development and usage of the new digital currency, in particular whether or not Chinese citizens, who already use the two biggest online payment systems run by Tencent and Alibaba, will adopt this new one.
What is the Digital Yuan?
The Digital Yuan is a digital currency issued by China’s central bank, the People’s Bank of China (PBOC). It is otherwise known as the Digital Currency Electronic Payment (DCEP), the digital RMB, and more commonly the e-CNY.
The digital yuan is part of China’s long-going attempt (first started in 2014) at digitalizing its currency. This includes the digitization of banknotes and coins currently in circulation. As such, it constitutes part of the monetary base of the country and makes up part of the cash in circulation. It is mainly intended to be used for high-frequency small-scale retail transactions.
It is important to recognize that the digital yuan is not a form of cryptocurrency, which is banned in China. The digital yuan, as explained above, is issued by the country’s central bank. Cryptocurrency, on the other hand, is a decentralized digital asset mainly operating on blockchain technology.
How does the Digital Yuan Work?
The digital yuan will be distributed via a two-tier system. The PBOC will disburse e-CNY to a list of approved commercial banks. These include:
- The Agricultural Bank of China;
- Bank of China;
- China Construction Bank;
- Bank of Communications;
- Postal Savings Bank of China;
- China Merchants Bank.
In addition to this, users may use the two digital banking systems WeBank (WeChat Pay) and MyBank (AliPay). Another option is for users to download the standalone e-CNY app or use the Alipay and WeChatPay apps to manage their e-CNY transactions.
Users may choose between individual digital wallets and corporate ones where they can link different bank cards. These wallets, furthermore, may be software-based (for example, through the use of the above-mentioned apps) or hardware-based. In the latter case, an electrical card is issued which allows for touch-based transactions.
As of October 2021, 123 million individual digital wallets and 9.2 million corporate ones have been issued, doubling in January 2022, likely because of the coverage of the e-CNY during the Beijing Winter Olympics.
Where is the Digital Yuan Available?
Currently, China has allowed 23 cities to try out the digital currency in real-world trials. Cities include the country’s capital, Beijing, as well as other major metropolises such as Shenzhen, Chengdu, and Suzhou (complete list below).
Many of these cities started their own promotion campaigns by releasing the digital currency to the public.
For example, in October of 2020, the government of Shenzhen released a total of 10 million digital yuan (or approximately 1.5 million USD) to be spent at over 3,000 merchants in a particular district of the city. The money was disbursed via a lottery to which nearly 2 million people applied and 50,000 won. Merchants include local supermarkets and pharmacies as well as Walmart.
In December of the same year, Suzhou announced the release of 20 million digital yuan (30 million USD) via lottery. Winners received “red packets” via an app containing up to 200 digital yuan to be spent on JD.com.
Beijing ran a similar trial with the vouchers to be used during 2021’s Lunar New Year Holiday. Each individual received 200 digital yuan (the equivalent of 30 USD). The money could be spent at several appointed offline locations and to make selected purchases on JD.com. The trial was available to those with a Chinese ID number, or residence permits from Hong Kong, Macao, or Taiwan.
Around the same time, the southwestern city of Chengdu announced a much more expansive roll-out of 40.2 million digital yuan (approximately 62 million USD) in the form of yet another lottery. Approximately 200,00 vouchers were given out with values ranging between 27 USD and 37 USD.
Although China has been attempting the internationalization of the yuan for some time, the digital yuan remains domestic in scope for now. It seems that international use is not of immediate concern, although the PBOC has begun laying the groundwork for cross-border transactions.
Currently, users in the following 23 cities can sign up to use the e-CNY app:
- Shenzhen, Guangdong province
- Guangzhou, Guangdong province
- Suzhou, Jiangsu province
- Xiong’an New Area, Hebei province
- Chengdu, Sichuan province
- Hainan province
- Changsha, Hunan province
- Xi’an, Shaanxi province
- Qingdao, Shandong province
- Dalian, Liaoning province
- Beijing (Winter Olympics and Paralympics sites)
- Zhangjiakou, Hebei province (Winter Olympics and Paralympics sites)
- Chongqing Municipality
- Fuzhou, Fujian province
- Xiamen, Fujian province
- Hangzhou, Zhejiang province
- Ningbo, Zhejiang province
- Wenzhou, Zhejiang province
- Huzhou, Zhejiang province
- Shaoxing, Zhejiang province
- Jinhua, Zhejiang province
Why is the Digital Yuan Being Developed?
The digital yuan is projected to provide financial and legal benefits as well as optimize monetary transactions.
Firstly, it aims to reduce the production and storage of cash and coins not only to reduce the costs of this endeavor, but also to accelerate the transition towards digital currencies and stimulate competition among the online payment market players. By providing an alternative payment method, other than the two major ones, would also guarantee an alternative in case the other payment systems are shut down due to cyber attacks or any other issue, preventing the disruption of the domestic market.
Moreover, the development and implementation of the digital yuan would also provide legal benefits.
For starters, it is set to allow for the tracking and prevention of illegal practices. Unlike cash, it is difficult to counterfeit digital currencies as they are more secure. Thus, the digital yuan would aid in tracking illicit flows of cash, such as money laundering or terrorist financing.
Last but not least, China is also working towards an internationalization of the digital yuan, developing plans for a cross-border central bank digital currency (CBDC).
The Digital Yuan App
In early 2022, the PBOC made the e-CNY Wallet app available on iOS and Android stores in China. By mid-January, the app had surpassed 261 million users (about one-fifth of the country’s population) and 87.5 billion yuan ($13.78 billion) worth of transactions had been made. It also rose to one of the most downloaded apps available in China.
Cash can be exchanged into e-CNY from one of PBOC’s authorized commercial banks (listed above) and from digital-only banking systems such as Tencent-backed WeBank and Ant-backed MyBank.
As of today, the app is only available to users in a list of pilot cities.
What are the challenges for the Digital Yuan?
First, critics have said that there is no real incentive to switch to the digital yuan when other forms of digital payments (in the form of Alibaba and Tencent) are already widely available and in use. For users to make payments with Alipay or WeChat, for example, all they must do is link their bank account to the app. The digital yuan, however, requires users to use the digital yuan app or to sign up for a separate app and link it to their Alipay or WeChat. It is unclear whether Chinese citizens and international users are willing to take those extra steps.
Moreover, Alipay and WeChat have a fundamental advantage as they are already placed into a larger system of apps and mini programs that offer a wide and comprehensive set of services and functions which are extremely popular within the users.
The leverage point of the e-CNY then, would be a better privacy and security enhanced by a variety of technologies such as digital certificates and digital signature, that will make illegal duplication and counterfeit and transaction falsification virtually impossible.
Privacy is indeed turning into one of the major concerns for the Chinese consumers which are starting to have their reservations towards the big tech companies and their data protection policies so it is possible that consumers may one day prefer to place their trust in a central bank rather than a tech giant.
Nonetheless, there is still no strong incentive for consumers to switch from their current systems and to take those extra steps to make this transition happen, but is fair to say that the project is still at its early stages and it will likely find its space in the near future with a constant back up from the government and the central bank.