CloudTree Ventures | Winston Ma | Jan 19, 2022
Today, China and the United States are competing and growing their technological capabilities in a wide array of sectors. The cutting-edge area of America and China’s technological war that’s been heating up recently is around who will dominate the blockchain and cryptocurrency industry.
Although China has cracked down on cryptocurrencies, shutting down all domestic crypto exchanges and banning all ICOs, blockchain technology itself is recognized as a revolutionary development by the government. In a speech October 2019 speech, Chinese President Xi Jinping declared blockchain would play “an important role in the next round of technological innovation and industrial transformation.” That marked the first major world leader to issue such a strong endorsement of the widely hyped – but still unproven – distributed ledger technology (DLT). (By contrast, most governments in the West have been far more cautious.)
Calling for blockchain to become a focus of national innovation, President Xi’s speech detailed the ways the Chinese government would support blockchain research, development, and standardization. China’s leadership position in the global competition of central bank digital currency (CBDC) is the prime example.
In April 2020, the People’s Bank of China (PBOC), China’s central bank unveiled the world’s first sovereign digital currency that is based on blockchain-like technology. (PBOC has started research and development for a digital version of the yuan, known as e-CNY, since 2014.) Since then, China has been steadily expanding its digital yuan pilot programs while also cracking down on cryptocurrencies. In July 2021, the PBOC issued a white paper detailing the current workings of the digital yuan, also referred to as the e-CNY, which is the first comprehensive disclosure of its plans.
The release of the white paper probably marks the near end of the testing phase, and the official launch may occur soon at the Winter Olympics in Beijing next year. As such, China is likely to be the first major economy to introduce a sovereign digital currency.
The rapid development of the e-CNY is only an inevitable result of China's robust digital economy. Even before the digital economy, mobile pay has grown rapidly in the last several years to become the dominant form of payment in China. Since 2020, China has been steadily expanding its digital yuan pilot programmes, given the country's rapid development of internet industries such as e-commerce and social network platforms that provide a myriad of application scenarios.
The digital yuan wallet supports several functions, including scan to pay, top-ups and money transfers. According to the white paper, as of June 2021, participants have spent 34.5 billion digital yuan ($5.3 billion) in trials. Uses include paying utility, dining, transportation, shopping, and government services. The new digit yuan would allow users to spend it even without an internet connection, and it will bring convenience to foreigners, too.
“Foreign residents temporarily traveling in China can open an e-CNY wallet to meet daily payment needs without opening a domestic bank account,” said the white paper.
That means even foreigners traveling in China can have access to the digital yuan without a domestic bank account. This is a particular benefit given the difficulties that foreigners have had using mobile payment apps like WeChat Pay (of Tencent) and AliPay (of Alibaba), because those apps must be linked to banking accounts.
Meanwhile, it’s worth noting that in its white paper, the PBOC cited the rapid growth in cryptocurrencies as a driver for research and development of the e-CNY and said that "cryptocurrencies are mostly speculative instruments, and therefore pose potential risks to financial security and social stability". This is the first time that the PBOC, in an official document, linked its sovereign digital currency issuance with cryptocurrencies’ potential challenges to the international monetary system.
According to the PBOC, “cryptocurrencies' lack of intrinsic value, acute price fluctuations, low trading efficiencies and huge energy consumption make them unfit for use in daily economic activities”.
Of course, the profound impact of e-CNY is likely to be more than China’s retail markets. Many believe the e-CNY will bolster Chinese currency's global status and eventually challenge the US Dollar’s preeminent position as the world’s reserve currency. For example, the e-Yuan could bypass western-operated cross-border payment networks, such as Swift, which the US has used to enforce sanctions.
But it’s likely a long march for the e-CNY.
“Though technically ready for cross-border use, e-CNY is still designed mainly for domestic retail payments at present.” the paper reads. For the e-CNY, its real test only starts after its official launch.
Authored by:
Winston Ma, CFA & Esq. (@Winston_W_Ma), is a Co-Founder and Managing Partner of CloudTree Ventures and an adjunct professor at the NYU School of Law. He is the former managing director and head of the North America office at China Investment Corporation (CIC), and author of Investing in China, China's Mobile Economy, The Hunt for Unicorns, and The Digital War.
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