WHY THIS MATTERS IN BRIEF
Tech giants are increasingly powerful and interwoven with society, and the Chinese government is making contingency plans in case they fail.
China has been at the forefront of developing the world’s first sovereign digital currency for a few years now because not only does it give the ruling party a way to monitor and control the flows of money like never before, but also because, for the very first time, it would allow a semi-automated government to create and deploy new financial policies at regional or even national scale in real time.
Now, as the first trials of the currency continue the Chinese government have announced that a key objective of the initiative is to maintain financial stability should “something happen” to Alipay and Tencent’s WeChat Pay, the two private platforms that dominate the nation’s vast digital payment market.
That’s worth dwelling on for a moment – for the first time in history a new sovereign currency would be a back up, essentially, to those offered by private organisations.
China is steaming ahead with the roll-out of its digital yuan, carrying out pilot trials in cities across the country as it shifts to a cashless society that will give authorities unprecedented powers to survey the nation’s payment and financial system.
At the same time, Beijing has stepped up scrutiny of its sprawling fintech system, showing just how serious it is about reining in malpractice among the nation’s internet behemoths and reducing the risk of financial contagion in the world’s second largest economy.
Speaking in an online panel discussion on Thursday, Mu Changchun, the director general of the digital currency institute at the People’s Bank of China (PBOC), outlined how the two policy agendas dovetailed.
“Everybody knows we have two big players in the retail mobile payment market, Alipay and Tencent Pay,” Mu said at the event organised by the Swiss-based Bank of International Settlements (BIS). “They have already taken 98 per cent of the mobile payment market.
“If something happens to them, financially or technically, that would definitely bring a negative impact to the financial stability of China. “In order to provide a backup for the retail payment system, the central bank has to step up and provide a central bank digital currency service.”
The PBOC also released new draft rules in January in an effort to curtail the influence of “nonbank service providers” in online payments.
China, already the world leader in digital payments, is aiming to be the first major economy to introduce a central bank digital currency (CBDC). Its successful launch could boost the international use of the yuan and reduce risks associated with cryptocurrencies like bitcoin. The PBOC has been researching and designing a CBDC since 2016.
Mu said it was important central banks cooperated to establish a broad set of “values”, including on monitoring and information sharing, to ensure compatibility between different sovereign digital currencies.
“Central bank digital currency supplied by one central bank should not impede another central bank’s ability to carry out its mandate for monetary and financial stability,” Mu said.
Mu said that cross-border flows of digital currencies must comply with each jurisdiction concerned and that “information flow and fund flows should be synchronised, so as to facilitate regulators to monitor the transactions for compliance.”
“Interoperability should be enabled between CBDC systems of different jurisdictions,” Mu said. “We also propose a scalable and overseen foreign exchange platform supported by DLT [distributed ledger technology] or other technologies.”
Mu said the PBOC had already shared its ideas on information sharing and monitoring with other central banks and monetary authorities. In February, China joined Hong Kong, Thailand and the United Arab Emirates (UAE), along with the BIS, to explore cross-border payments for digital currencies. However, some major central banks such as the US Federal Reserve remain cautious about launching a CBDC.
“Because we are the world’s principle reserve currency, we don’t need to rush this project, we don’t need to be first to market. A dollar CBDC would have potentially large implications here and around the world,” said Jay Powell, chairman of the Federal Reserve, who spoke on another panel at the same event on Monday.
“We’d be sure to think carefully about all of that and to engage very broadly with the public around the world, particularly here in the US before we even approach a decision.”
A survey by the BIS released in January found that 86 per cent of central banks have been actively engaging in some form of CBDC research. The survey also found that work related to retail CBDCs is gaining in relative popularity, with more central banks either looking at both wholesale and retail or narrowing their scope of work down to retail only.
While the Eurozone has been exploring the possibility of rolling out a CBDC, Germany’s central bank Deutsche Bundesbank is concerned that a digital euro could pose risks to banks.
“There are other ways to satisfy the needs of the consumers or firms than a central bank digital currency so there is no rush or urgency to introduce CBDC. I think it’s rather something we should reflect on very carefully,” said Jens Weisman, head of the Bundesbank at the BIS event on Monday.
Bank of Japan Governor Haruhiko Kuroda said last week there was a need for the central bank to “prepare thoroughly” for the time it may need to issue its own digital currency, but there currently is no plan to issue a yen CBDC.