Cryptocurrency has hitherto been limited to tech giants such as Alibaba and Facebook, but now China is looking to launch its own digital currency, one backed by its central bank.
The e-yuan, or Digital Currency Electronic Payment (DCEP), is not altogether a new concept. Many countries have considered implementing it for years, but China has proven to be the locus of the first major economy to seamlessly introduce it within its technologically adept population.
In 2020, 776.08 million persons were using mobile payments in China. To place that in perspective, 1.4 billion people are living in China. Hence, a little more than half use mobile payments.
From an international perspective, some may wonder why financial tech companies are sharing the vast Chinese cryptocurrency market. In actuality, however, there is very little ‘sharing’ involved: virtually all users possess Alibaba’s Alipay or Tencent’s WeChat.
Tech giants such as Alibaba have set their own guidelines and agreements with various merchants and have the power of data behind them. User profiles (formed through a combination of social media profiles), financial services, and e-commerce, all render traditional institutions inferior in the eyes of consumers.
Beyond the convenience aspect, cryptocurrency has been on the rise because it lowers the threshold of banking. For example, if one brings $10 to a traditional bank there is almost nothing to be done from it, but $10 can immediately be transferred and utilised within a mobile payment app.
China’s rural population lacks the necessary money, but it still retains smartphone usage, meaning that it is included in those who can benefit greatly from digital currency. It therefore comes as no shock that nearly 47% of the rural population is reported to regularly use mobile payments.
The pressure faced by the Chinese government is twofold. On the one hand, there is the duopoly between Alibaba and Tencent that is consuming the financial industry, and on the other, there is the growing trade war with the United States. SWIFT – the top mediary for international transactions – is largely controlled by the U.S.
The secure financial network safely codes transactions and renders them secure, and for years it has been the most widely used system. Perhaps it is outdated by now and China is attempting to improve the encoded system via innovation, but with a joint venture recently set up between SWIFT and the DCEP, its actions might be more about reducing the reliance on relations between China and the U.S.
Even so, the reasoning is not so clear since the partnership is still in the works. Curiously enough, in mid-April the UK announced its own plans for a Central Bank Digital Currency (CBDC), hinting that digital currencies backed by the government are potentially worth exploring worldwide.
The most prominent advantage of possessing a digital currency backed by the central bank is the legal force behind it. Alibaba can set up its own guidelines and restrictions, but the Chinese government can mandate merchants and cross-border transactions to involve the e-yuan. Fundamentally, everyone must treat the e-yuan as cash once it launches.
Yet some have claimed that the Chinese government is looking to further survey and control the economy through the DCEP, and although there is a case to be made for this, many may not realise how transactions are made. For example, AliPay is linked to phone numbers, and in China, each phone number must be attached to an identity.
So what does this process entail? All banks must report financial transactions, including ones made by DCEP to the Chinese government. This means that on a practical level, the fintech companies simply act as middlemen who are obliged to report to the government.
Although this surveillance is not a new phenomenon, the DCEP does provide the government with the power to mimic the current activities of fintech companies. Through this direct pipeline, the government can compile citizen profiles consisting of the data that fintech companies already have.
Moreover, DCEP differs from traditional e-payments in which a transaction must use a third-party intermediary. When it fully launches, DCEP transactions can be used without the internet or a bank account; instead, near-field communication (NFC) technology is used.
China is operating on an increasingly cashless basis, and it may thus pave the way for other countries to embark on the journey of decentralising the power of tech giants within their borders. Whether that is a positive thing, it is too early to determine.
Ultimately, one thing is certain - cashless transactions are becoming increasingly relevant and there is an ever-growing need to adapt.