SINGAPORE (July 17): Besides the absence of a central authority, another attractive attribute of blockchain-based cryptocurrencies is the speculative element where prices go through big, frequent swings. China, for obvious reasons, will make sure there are neither attributes with e-RMB.
Instead, PBOC will likely adopt a centralised model based on this technology, which gives it greater oversight over transactions. Like central bank-issued fiat currency, e-RMB does not require a basket of assets to support it.
And of course, e-RMB is not for punters to play around with as well. “The digital yuan is used for spending, not for speculation,” says PBOC currency head Mu Changchun in a Shanghai Securities report, taking a leaf from a famous 2017 warning by President Xi Jinping that houses are meant to be resided in, and not for speculation. “It does not have the characteristics of bitcoin speculation, nor does it require a basket of assets to support its value like stablecoins,” he adds.
In trying to impose these two attributes, China is up against the nature of conventional cryptocurrencies in existence. Norton Rose Fulbright attorney Etelka Bogardi notes that the open nature of blockchain technology does not fit well with Beijing’s desire to maintain a level of control and oversight over its digital currency, necessitating an alternative system for the government to roll out its e-RMB.
Unlike cryptocurrencies, which use distributed ledgers and strong cryptography to capture details of coin ownership and transaction, PBOC favours a centralised ledger model that will record and monitor transactions. According to DigFin, Mu explains that e-RMB will operate on a two-tier operating system where the central bank first converts RMB balances held by commercial banks or issuing agencies such as Alipay and WeChat, to e-RMB before relying on these agents to disseminate the currency to consumers.
However, there is some flexibility as well. PBOC will not determine the settlement and clearing technology that issuing agencies can adopt, with each having the autonomy to pick the set-up that best suits it. Mu even says that blockchain could be an option for an issuing agency if they believe that it is the best way to manage the clearing of transactions conducted under the purview of their own organisations. Economies of scale and network effects associated with building a consumer network means that only the largest financial institutions can get involved with e-RMB payment.
These transactions will largely be executed via e-wallets that will likely be issued by banks and e-payment providers. A prototype issued by the Agricultural Bank of China has four basic functions — scanning QR codes for payment, sending money to another account, setting up a QR code to accept or make payment, and lastly, payment by touching phones. The last function runs on two-way offline payment technology, allowing for transactions without internet connection — useful in more rural parts of China and therefore meeting the objective of serving the unbanked.
PBOC has sought to assure nervous would-be users that their financial transactions would not be subject to a state panopticon. According to a DigFin report, Mu claimed that e-RMB accounts need not necessarily be linked to one’s primary bank account, allowing more space for users to retain a degree of anonymity in their transactions. Yet, e-RMB transactions, the report continues, may be anonymous between users and are managed by issuing agencies with account and transaction information synchronised with the central bank, placing a strong onus on PBOC to enforce tough regulations on personal data protection to guard user privacy.
How does this concept differ from PayNow in Singapore? One main difference, it seems, stems from where the money is stored. While the capital stock backing the amount of money paid over PayNow is primarily backed up by bank deposits, the Chinese government proposes to issue money to banks directly in the form of digital currency directly backed up by the government’s capital reserves.
With cash money being relatively more expensive due to the cost of printing secure bank notes and ensuring their physical security, both the government and the banks may be able to enjoy cost-savings.
Bogardi, in fact, questions whether financial intermediaries could potentially be done away with altogether in the long run. “If consumers hold more digital deposits by phone, banks have no deposit holdings so they cannot lend,” says Bogardi, a former senior counsel at the Hong Kong Monetary Authority. Should the government opt in future to take on the responsibility of providing e-payment infrastructure directly to consumers, this could see financial intermediaries such as banks or even e-payment providers like Alipay rendered redundant, she says.
While e-payment apps will still be the primary mode of making payment in e-RMB, Bogardi believes that Beijing would like to retain at least the option of taking more control of e-payment in future. Should one of these apps fail or be otherwise incapacitated, the Chinese economy and financial system could well be severely disrupted as transactions bottleneck or stall in the case of technological failure. Systems like two-way offline payment and, eventually, potentially increased government participation in e-payment, could keep financial transactions moving should private e-payment services be unavailable.
The rise of e-RMB is the latest step for China on its road to becoming a global technology leader. “The US is still the world’s leader, but China is coming up very fast,” says innovations expert Rebecca Fanin in an interview with Knowledge@Wharton. By taking pole position in the central bank-issued digital currency space, China may have gain a step closer to Uncle Sam.
