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The Challenges Ahead for China’s Digital Yuan

Liu Ran, Wu Xiaomeng and Denise Jia wrote . . . . . . . . .

In three years of experiments, China’s central bank has made significant progress in developing its central currency.

Total transactions since late 2019 reached 83 billion yuan ($12.3 billion) as of the end of May. Nearly 4.6 million merchants across China have come to accept the digital yuan, known as the e-CNY, as payment. People have used it for shopping, dining, personal finance and business uses such as paying taxes and employees.

For all that, the People’s Bank of China (PBOC) still has a long way to go in its digital currency project. Use of the e-CNY in pilot programs is a drop in the bucket compared with the volume of commerce conducted using China’s two dominant mobile payment systems — Ant Group’s Alipay and Tencent’s WeChat Pay. Alipay’s monthly transactions alone averaged 10 trillion yuan in 2020, the company disclosed.

To bridge that gap, a large amount of investment in technology will be required. Achieving the second-by-second payment processing capacity needed to handle the massive volume of transactions in China’s economy will mean spending billions of yuan to build data centers and add servers and bandwidth, Caixin learned.

Expanding the PBOC’s pilot programs and application scenarios will create demand for software and hardware upgrades at financial institutions as well as opportunities for smart hardware consumption, attracting more capital into the emerging sectors. At the same time, the central bank will have to establish and amend regulations as the current rules covering finance, taxation, accounting and statistics based on a physical currency will no longer be applicable with the digital yuan.

At a meeting Aug. 1, the central bank vowed to further expand trials of the digital currency. Currently, the e-CNY is being tested in 23 cities and regions in 15 provinces and provincial-level cities. But the expansion will face challenges as Chinese consumers are already used to the convenience of Alipay and WeChat Pay.

The main purpose of the pilot program is to build confidence in the digital yuan’s reliability and ease of use, said Mu Changchun, the head of the central bank’s digital currency research institute. The digital yuan is a legal currency issued by the PBOC and backed by the government, Mu said.

No matter what form it takes, a currency has three main functions: as a store of value, a unit of account and a medium of exchange. For consumers, the most basic function is as a medium of exchange or payment. The central bank’s digital currency research institute set its goal for the e-CNY to quickly reach the same experience as all other payment tools in the market, Mu said.

Focus on retail

Central banks have two options for digital currencies: a wholesale central bank digital currency (CBDC), mainly issued to institutions such as commercial banks and mostly for large-value transactions, or a retail CBDC issued to individuals and businesses for daily transactions. From the beginning, China aimed for a retail currency. The main purpose of developing the digital yuan is to meet needs for domestic retail payments and improve financial inclusion, according to PBOC Governor Yi Gang.

The e-CNY will fully meet the public’s daily payment needs, further improve the efficiency of the retail payment system and reduce costs, the central bank said in a progress report in July 2021.

Promotion of the digital yuan started with money giveaways by local governments for shopping. Shenzhen, one of the first pilot cities, in October 2020 handed out 10 million yuan of e-CNY to the public that could be spent at restaurants and shops. Other pilot cities followed suit.

In May, Shenzhen distributed an additional 30 million yuan of e-CNY to local residents in a joint promotion with food delivery platform Meituan Dianping. During the project, more than 520,000 merchants on the platform accepting e-CNY reported that orders increased by 58.9% and transaction amounts by 64.6% from the same period a year earlier.

The challenge now is how to improve the e-CNY’s use and stickiness with users and merchants, officials said. Salary payments and other corporate transactions can help expand its use. When people get paid in digital yuan, they have to spend it, the PBOC’s Mu said.

In the next step, the central bank will promote deeper e-CNY integration for the public and for personal business; support fund management and salary payment services for micro, small and medium-sized enterprises; and back public sector services such as taxation and government transactions, said Fan Yifei, a PBOC deputy governor.

Beyond consumption

Use of the digital currency has been extended beyond consumption. Since June, state-owned China Construction Bank has been allowing customers to use the e-CNY to purchase wealth management products. On June 10, a customer purchased the first auto insurance policy using the e-CNY.

The PBOC has also explored innovative e-CNY applications. During a pilot program, smart contracts were used to make the e-CNY programmable, more expandable and better integrated into various scenarios, the central bank said.

In pre-paid consumption, such as long-term apartment rental platforms and tutoring businesses, there have been multiple cases in which owners of failed businesses absconded with consumers’ pre-paid funds. The digital yuan is believed to have the capacity to help prevent such thefts.

In December 2021, Agricultural Bank of China and Huawei Technologies Co. Ltd. launched the first e-CNY-based apartment rental supervision platform in Shenzhen. In May, China Construction Bank and the Futian District government of Shenzhen jointly established the country’s first e-CNY prepaid platform for education and training companies. In July, Bank of Communications signed an e-CNY prepaid tuition custody service agreement with a Beijing-based English training company.

Under such digital yuan-based custody models, consumers’ prepaid funds are stored in personal digital wallets, and only the actual amounts being consumed are released to merchants. This effectively defuses the risk that business owners will vanish with customers’ funds, Mu said.

In the future, consumers may use prepaid funds in digital wallets to buy wealth management products, and banks may provide loans and other financing for merchants, which will improve efficiency, Mu said.

Fees for merchants

To reduce competition with bank deposits, e-CNY funds pay no interest and circulate in the same way as the physical currency in a two-tier system under which the PBOC issues currency and commercial banks exchange e-CNY for the public. To increase public acceptance of the e-CNY, the central bank currently does not charge fees to banks and other operating institutions for the conversion and circulation of the digital yuan, and institutions do not charge customers for conversion.

The central bank has never promised that the digital yuan will always be free for merchants. An industry researcher said it’s not realistic to keep the use of digital yuan free in the long run.

“The e-CNY has not been fully marketized and is still in the pilot stage,” the researcher said. “We will gradually explore a healthy and sustainable business model.”

To give full play to the two-tier operating structure, it is necessary to adhere to a market-oriented development and allow market institutions to participate in the system in a healthy and sustainable way, requiring an incentive mechanism, Mu said. The digital yuan is free for individual consumers, but banks can charge fees to other operating institutions, such as insurance companies and online platforms, which then can charge fees to merchants, Mu said.

Caixin learned that related rules are in the works and that future regulations will set a cap for such fees.

Opportunities for tech firms

Building the digital yuan system will require talent and technology, creating business opportunities for tech companies, said Lu Wei, chief computer analyst at Minsheng Securities.

Compared with large banks and internet companies, small and medium-sized enterprises will benefit more from the expansion of the e-CNY in the short term, said Cao Senyuan, an analyst with Zhongtai Securities.

In the process of promoting the digital yuan, two categories of demand will emerge: Banks will need to transform and upgrade their digital currency systems, and applications will need to be created in finance, government affairs, credit, taxation, agriculture, supervision and other areas, Cao said.

Shenzhen Techo Telecom Co. Ltd., a financial cloud platform business, is one of the industry pioneers exploring digital currency. It set up a subsidiary—Shenzhou Fangyuan—to develop innovations based on various applications for the e-CNY.

As a technology provider at the Beijing 2022 Winter Olympics, where the digital yuan was tested, Shenzhen Techo helped banks to build and test systems. In the future, the company will explore applications for the digital yuan in multiple scenarios such as prepaid cards, logistics, supply chain finance, government affairs and taxation, property rights deals, and enterprise services, said Dai Ke, deputy general manager of Shenzhen Techo.

New Rules Needed

As the e-CNY is China’s official currency, existing international standards and Chinese laws against money laundering and financing terrorism apply. The job of protecting consumers’ rights and interests in the e-CNY system are the same as for physical cash. However, regulatory measures and requirements for the e-CNY need to be tailored, the PBOC said in its progress report.

At a March meeting, the PBOC called for forward-looking legal structures to ensure the security of the digital yuan. China plans to tighten legislation around the digital yuan to protect user privacy and combat illegal activities such as money laundering and terrorist financing, Mu said in a July speech at the 5th Digital China Summit.

To guarantee the anonymity of the digital yuan, authorities plan to improve regulations, including establishing a mechanism to regulate the use of customer information so that operating institutions will be able to apply for access to user information only for risk analysis and monitoring when illegal transactions are suspected, Mu said.

Source : Sixth Tone

China Vows Privacy, Information Protection in Using Digital Yuan

China will fully respect privacy and protect personal information in using the digital yuan, state media quoted a senior central bank official as saying on Sunday, as Beijing encourages greater adoption of e-CNY.

Limited anonymity is a key feature of the digital yuan, Mu Changchun, director-general of the central bank’s Digital Currency Research Institute said, noting it ensures reasonable anonymous transactions.

“On the other hand, it also prevents and combats illegal activities including money laundering, terrorist financing and tax evasion, maintaining the need for financial security,” the Securities Times quoted Mu as saying at a forum.

The People’s Bank of China is a front-runner in developing and issuing a central bank digital currency (CBDC), which in the case of the e-CNY will be a traceable replacement for notes and coins.

Other central banks are looking at developing CBDCs to modernize their financial systems, ward off competition from cryptocurrencies such as bitcoin and speed up domestic and international payments.

China’s efforts are among the most advanced globally, and the country has been running various trials and pilot schemes of different payment scenarios in recent years.

Mu also said the e-CNY, which is the digital version of fiat currency issued by the PBOC, can be used to purchase anything that can be bought with banknotes and coins.

“Banknotes and coins can buy gold and convert foreign currency, so does the e-CNY,” he said.

In May, some cities distributed free digital cash to revive consumption and help businesses hit by pandemic curbs, with more e-CNY applications expected in future to boost transparency and effectiveness of government policies.

Source : Financial Post

Why We Should Not Worry About the Digital Yuan

Anne Stevenson-Yang wrote . . . . . . . . .

In an April 4 op-ed for Bloomberg, the economist Niall Ferguson ominously warned that China is «minting the money of the future.» That suggests that the digital yuan is an innovation coined virtually by an unstoppable Chinese mint-of-the-future, having something to do with internationalizing the yuan and harboring some mysterious power that will dethrone the dollar.

It doesn’t, hasn’t, and won’t.

Ever since the «reform and opening» of 1979, the world has hoped that massive dependence on trade and foreign investment would force China to integrate with law-based international institutions. Instead, for its 40 years of expanding trade, China created special-purpose interfaces with those institutions that might be compared with carrying Google Translate on a trip to the market in Vietnam: the tool is not going to enable deep communication with the vegetable vendor, but you can use it to settle on a price for the tomatoes. Domestic institutions have hardly been touched since 1979. Instead, China has carefully crafted investment, regulatory, and public-relations moves that have strengthened the asymmetry of external trade and investment realities, penetrating overseas markets while protecting the home front.

It is notable that China vowed a decade ago to make the Renminbi convertible, as part of the effort to designate the Renminbi a reserve currency at the IMF, after which many believed that international trade settlement would shift into yuan. Certainly, after the global financial crisis, China’s leaders spoke loudly about the necessity of replacing the dollar, if not by the yuan, then by a Special Drawing Rights (SDR) currency or the like.

While repeatedly and generally stating that the yuan would be made convertible «at an appropriate time,» in late 2015 when China began its preparation year for inclusion of the yuan in the SDR, it specifically committed to making the yuan convertible by the formal inclusion date of October 2016.

Five years later, that still has not happened. China did not bring its currency any closer to convertibility, but it did move the convertibility and internationalization discussion into the shade, toward «innovation,» with even vaguer references to international use.

As the strategy of building special-purpose interfaces with international institutions reaches the end of its useful life, China is seeking to withdraw from the broader world legally, economically, and socially. The data collection role of the digital yuan, completely centralized in the recently established clearance monopoly called NetsUnion, is part of that, and shows the trend is toward greater control at the expense of the private firms in finance that actually innovated and popularized electronic payments on the Mainland.

When Alipay and WeChat Pay came along, they whisked trillions of Renminbi in quarterly payments from the banks and into privately owned wallets. The People’s Bank of China (PBOC) initiative to create a digital currency represents the Chinese government’s determination to reclaim mastery over the realm of all financial transactions that occur within its borders.

Myths of Innovation

The first red herring to discard is the widely held idea that the rapid digitalization of payments in China is amazingly innovative and technically impressive. Ferguson repeats this bromide as delivered wisdom: «As is well known, China has led the world in electronic payments, thanks to the vision of Alibaba and Tencent in building their Alipay and WeChat Pay platforms.»

When AliPay was founded, in 2003 (five years later than its model, PayPal, which was well established at the time of acquisition by eBay in 2002), Chinese people universally had to line up every month at the bank to pay their mortgages and cell phone bills. Rich people sent drivers and assistants to line up. There were no personal checks, no credit cards, and few debit cards, which had to be physically presented. ATMs emerged in 2000. By 2004, 1% of Chinese had a credit card. Cash-and-carry was the only practical option.

Compare that to the United States:

  • Personal checks were first issued in 1880.
  • Trading stamps, such as the S&H Green Stamp and the Eagle Stamp, early versions of loyalty programs, had a nominal cash value and were sometimes used in lieu of cash before credit cards became common. Arguably, trading stamps, which were issued by thousands of retailers, were as much of a challenge to the dollar as bitcoin is now.
  • The first credit card was issued in 1950. Visa was formed in 1976 and Mastercard in 1979.
  • Debit cards were first issued in 1978 and became common in the 1990s.
  • By 2000, did anyone in the U.S. go to a bank to pay for utility bills or other recurring obligations?

AliPay and WeChat Pay began to take off largely as a result of smartphone penetration and the fact that the state-owned bank quadropoly had taken no steps at all toward customer convenience other than to build more branches. By that time, U.S. and European consumers had long ago left cash behind. The world did not convert to Apple Pay or Google Pay because these systems lack innovativeness but because no one saw much need. And that is why China’s prevailing electronic payment systems do not gain traction in mature economies.

Banks and Politics

The second red herring is the idea that a digital yuan presages China’s taking over the world, financially if not politically. Ferguson writes: «The expansion of a Chinese digital currency will ultimately pry open the U.S. grip over global payments.»

The U.S. dollar represents more than 79% of global payments in value terms and 40% in number, with the great majority of the balance accounted for by the Euro. The Renminbi is less than 2%, if anything shrinking in terms of global relevance. Why? Because the Renminbi is not available. Try going to your bank to buy some for a trip to China. Try trading a handful for dollars at the local branch for some Renminbi. That does not work, because China does not want it to. China does not want its citizens to be able to buy real assets from abroad freely with their Renminbi, and China does not want to buy more goods than it sells, which is the way to make Renminbi available. China wants to amass dollars. The oft-referenced practice of Chinese families to have high savings rates, essentially to hoard cash, is clearly reflected in the collected, national policy inclinations.

Chinese people fled the banks very quickly when offered an alternative, because Chinese banks are genuinely horrible, offering a combination of under-market returns and long waits, inconvenient hours, and interactions with everyone from impudent tellers to bank managers who treat you like an insignificant speck of dust. The most routine transactions require lots of time at the window, because tellers operate under a bank of video cameras, and after entering information in their computers, they have to wait for approval from an invisible overseer in a remote room.

Because the banks are the most important control channel from the Party to the people outside the security apparatus, their oversight function is more important than their service function. That point should not be missed in discussing the utility and goals of the digital currency electronic payment project. It took private companies with economic motive to build a huge user base to shell out for a huge network of compatible vendors before digital payments would become available.

The Chinese government has a venerable tradition of outsourcing to the private sector the hard work of building distribution networks. The very small private-sector enablement granted at the beginning of reforms encouraged retail in goods and services, and there are dozens of other examples. Once they have figured out the business model and frontline players achieve scale and profitability, state players take back the networks. That is what is happening with the digital yuan. The key motivation has nothing to do with convenience or efficiency or reducing crime—it’s all about capturing information and, at this point, regaining control after a raucous decade of financial laissez-faire.

Big Brother Is Watching

The key to China’s digital yuan is the «big data center» at the core of the new network. That is where personal purchases will be analyzed and spliced with demographic data to develop profiles. This is where yuan exchanges into other currencies will be tallied. The profiles will be shared with security agencies in order to target people considered a security risk, and they will inform social credit scores. But they will also be monetized to the extent possible—risk profiles for lenders, purchase proclivities for marketers.

Alibaba and Tencent have never fully developed these capabilities, partly because they could mint money without doing that and partly because they do not have access to the full range of information that the PBoC will have in its «big data center.» The PBoC now proposes to develop spending profiles and use AI technologies to know everything about everybody. If history is a guide, the effort may not be all that successful, but absent any transparency or privacy constraints, it can nonetheless lead to a lot of infringements on personal rights, even inadvertently through corruption and abuse or simple technical failure. The history of the «dangan» personal portfolio, available for examination and alteration by many people but never by the subject, tells us that.

Behind the debate over the significance of the digital yuan is a gee-whiz attitude toward the mythologized technology behind crypto currencies. Older people often adopt the same indulgent bemusement toward crypto that they direct at multi-use controllers and programming the TiVo. Great that it can do so many things, but the investment in learning is not worth the return in convenience.

Actually, the technical issues behind crypto currencies are a footnote, not unlike the issues surrounding paper and ink for printing banknotes. The technology does not tell you what the currency is for. In the end, governments issue money because they own real assets, like land, resources, buildings, and militaries, and provide real services, like education, healthcare, unemployment support, retirement support, and personal and asset security. They tax in their currencies to support these things.

The Chinese yuan, encrypted in a virtual wallet or numeric, in bank accounts, is only as good as those assets and services.

Source : The Market

Read more at 中国人民银行

中国数字人民币的研发进展白皮书(pdf) . . . . .

Hong Kong to Test Linking China’s Digital Yuan with Domestic Payments

Hong Kong is to test connecting China’s digital yuan with its domestic payments network, officials said on Tuesday, the second stage of trials of China’s digital currency in the financial hub.

China’s e-CNY is one of the most advanced central bank digital currency (CBDC) projects among major economies. Chinese officials say the project will be initially domestically focused, but cross-border trials are also under way in Hong Kong.

Countries around the world are looking at developing CBDCs to modernise their financial systems, ward off the threat from cryptocurrencies and speed up domestic and international payments.

This latest trial will explore how Hong Kong residents can top up an e-CNY digital wallet using the city’s faster payment system, currently used to make domestic payments via mobile phones.

“This will help Hong Kong residents to use e-CNY when they cross the border,” Nelson Chow, chief fintech officer of the Hong Kong Monetary Authority (HKMA), told a media briefing on Tuesday, as the regulator launched several other fintech initiatives.

An earlier small-scale trial explored using e-CNY digital wallets in Hong Kong.

The HKMA also said on Tuesday it would issue a paper exploring the feasibility of issuing a retail-focused CBDC, an e-HKD, within 12 months. The paper will consider potential use cases, as well as data privacy, and anti-money laundering standards among others.

The regulator had previously said it was focused on using CBDCs as a way of streamlining cross border interbank payments.

“People are now a lot more used to digital payments, and if other central banks are exploring possible use cases for CBDCs… you have to try out to see whether you can make it successful,” Eddie Yue, HKMA’s chief executive, said at the same briefing.

The HKMA’s trials of cross-border interbank CBDCs continue alongside the other consumer-focused projects, and earlier this year, China and the UAE’s central banks joined an HKMA and Bank of Thailand wholesale CBDC pilot.

Source : Reuters

With China’s Digital Yuan, Think Surveillance

Milton Ezrati wrote . . . . . . . . .

Ever since China launched its digital yuan in 2019, western commentary has reacted to the initiative with waves of nonsense. Many of these articles suggest that the People’s Bank of China (PBOC) has stolen a march on the West. Many claim that China’s digital effort will secure the yuan global status and enable it to supplant the dollar as the world’s premier currency for international reserves and transactions.

The venerable Economist magazine forecast that soon everyone everywhere will be using the digital yuan. The most recent wave of such commentary emerged after the Federal Reserve (Fed) and other central banks announced that they, too, are looking into digital versions of their own respective currencies. Media attention has suggested that the Fed and others are playing catch up.

These claims are overblown to say the least, entirely misplaced, in fact. A digital yuan hardly constitutes a basis for a global currency. Many countries, including the United States, have laws against transacting domestic business in any currency other than their own. Besides, a digital yuan could add only marginally to existing digital arrangements in which credit and debit cards, Apple watches, PayPal, easy wire transfers, and the like have long-provided efficient and convenient ways to manage both international and domestic transactions. All the digital yuan would do is add a new layer to this fully functioning system. That addition hardly constitutes a revolution, any more than if American Express were to issue a new kind of card. Nor will a digital version of the yuan overcome all the many impediments in the way of its ability to become the premier global reserve currency.

What should have been clear at the onset is that rather than creating a global upset, the digital yuan, in a manner entirely consistent with so much else Beijing does, aims at domestic surveillance.

Issuing a digital currency—whether a yuan, a dollar, a euro, a yen, whatever—takes a big step toward supplanting paper currency and coin, and thereby the main way people can transact business anonymously.

There is, of course, Bitcoin and other cybercurrencies, but they are less a factor than paper and coin, at least for most populations. In any case, China has already closed off these avenues for its population by banning Bitcoin and other cybercurrencies.

virtual currencies
Representations of the Ripple, Bitcoin, Ethereum, and Litecoin virtual currencies are seen on a PC motherboard in this illustration picture, on Feb. 14, 2018. (Dado Ruvic/Reuters)
Paper and coin are about the only way people in China can evade strict controls and get assets out of the country or into an alternative currency. By using the digital yuan to eradicate paper and coin, or at the very least severely limiting their role, Beijing will have closed off any ability of its citizens to move assets and transact business unobserved. Once this happens, the authorities will have the ability to track every citizen’s transactions, how much each person spends, on what, where he or she spends it, as well as when.

Central banks, even in less authoritative systems, could do the same with their digital currencies once they take hold, but they will likely be less ambitious than the PBOC and think mostly in terms of money laundering and tax evasion. Whether the government’s focus is narrow or broad, surveillance of one kind or another is the objective.

To be sure, the authorities everywhere have the option of using existing digital networks to track most people’s transactions, whether through credit card, bank, or equivalent records. But accessing these still largely private sources is cumbersome and, in some places, faces numerous legal hurdles. Beijing might face additional impediments because today much of this information resides abroad. Accessing the elements of this system would also have a hit or miss quality that would prevent the authorities amassing an all-but-complete picture of people’s transactions.

But a digital currency would have it all in one easily accessible government computer. The arrangement could even enable the authorities to develop algorithms to cull transactions and flag anything suspicious, something that is all but impossible with current arrangements. Besides, it is already clear that current digital arrangements, for all their convenience and efficiency, have not driven out paper and coin as effectively as digital currencies are likely to do.

Beijing does indeed have grand global ambitions. It clearly wants to make China the world’s leading economy and see the yuan supplant the dollar’s global position. It wants to dominate world trade, a clear objective of the Belt and Road initiative. And it wants the political, diplomatic, and military advantages that goes along with such economic and financial dominance. The digital yuan might have a role in this grand scheme but only after Beijing has put into place other, needed, and much more significant elements.

For now, the digital currency is neither part of such grand designs nor the “revolution” described by less-than-thoughtful western reports. It is instead a straightforward if innovative way to secure still more complete domestic control and thereby ensure that nothing the Chinese people do, even inadvertently, can threaten the authorities in Beijing.

Source : The Epoch Times


记者: 王存福、胡璐




Source : 新华网

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场景添新覆盖更广 数字人民币试点再扩容 . . . . .

Digital Yuan to Have Highest Privacy Protection, Says PBOC Official

Chen Jia wrote . . . . . . . . .

China’s digital currency will feature “controllable anonymity”, which means transactions will be anonymous and personal information will be protected, while preventing potential illegal financial activities such as money laundering, terror financing and tax evasion, said a senior official from the central bank.

The testing of the digital RMB, or e-CNY, is ongoing.

“The protection of users’ privacy by e-CNY is at the highest level among all of the existing payment tools,” said Mu Changchun, head of the People’s Bank of China’s Digital Currency Research Institution, on Saturday.

Different from opening a bank account which requires real-name authentication, e-CNY can technically realize anonymous small-scale transactions. Based on the principle of “know your customer”, users can open multiple digital wallets having different levels of maximum payment limit, the PBOC official said at the China Development Forum 2021 in Beijing.

This design can prevent suspicious risks of large transactions while protecting privacy, he said.

Users of the e-CNY could open an anonymous digital wallet through registering a mobile phone number, and any telecom operators should not disclose information about customers to the central bank, or other third-party institutions. “Therefore, wallets opened with mobile phone numbers are completely anonymous to the PBOC and various operating agencies,” said Mu.

The e-commercial platforms which adapt payments of the e-CNY will not have access to personal information of the users, he added.

But for large transactions that may break laws, the central bank will provide clues to law-enforcing departments based on big data analysis. If any illegal activity happens, such as telecom fraud using e-CNY, its design which can chase the transaction process would help the people get their money back and protect their property rights, said Mu.

Source : China Daily

Zhou Xiaochuan: China’s Digital Yuan Aims to Halt US ‘Dollarisation’, Boost Retail Payments

Frank Tang wrote . . . . . . . . .

China’s sovereign digital currency is designed primarily to grow retail payments at home and prevent the dominance of the US dollar, rather than address threats raised by cryptocurrencies or stablecoins, a former central bank governor says.

Zhou Xiaochuan, who led the People’s Bank of China from 2002-18, said China was working hard to establish its digital currency and electronic payment (DCEP) system, but its focus differed from the Group of 7 (G7) principals.

“What they are concerned about is mainly to deal with the challenges raised by Libra, bitcoin and similar digital encrypted currencies,” Zhou said during a video conference on Tuesday at the Eurasia Forum, an event hosted by the Hungarian central bank.

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In a report released in October, the G7 said stablecoins – digital currencies like Facebook’s Libra that are linked to a pool of assets – need to be appropriately supervised to prevent threats to global financial stability and ensure they were not used to fund illicit activities or tax avoidance.

What is China’s sovereign digital currency?

Zhou said China believed digital currencies must “respect exchange regimes and currency sovereignty”. But he added a major factor in Beijing’s digital currency plan was to avoid “dollarisation”, where the US dollar is used in parallel or instead of the local currency.

China’s central bank is inching closer to the launch of its sovereign digital currency, publishing a draft law on Friday that would give legal status to the DCEP system, and including the digital yuan as part of the country’s sovereign fiat currency.

Zhou is a key backer of China’s digital currency plan and it was under his watch the central bank launched a special institution in 2014 to develop the digital yuan.

China, which has cracked down on cryptocurrencies, has begun trails of the digital currency in Shenzhen, Suzhou, Xiong’an and Chengdu, and will test it during the upcoming Winter Olympics.

The central government has made it clear that the goals of the DCEP include replacing cash, maintaining government control over the currency and creating as many small retail application scenarios as possible.

The digital yuan will be distributed through China’s central bank to authorised second-tier providers, including large state-owned banks, state-controlled telecom operators and online payment providers Ant Group and Tencent, Zhou said.

“The relationship between institutions at the two tiers is not like that between traditional wholesale and retail businesses,” he said.

China’s central bank will guarantee the value of the digital yuan with oversight measures including reserve and capital ratio requirements.

Our mandate is to build up a solid base of retail payments domestically, and [as for cross-border payment] we should focus on the current account payments, such as tourist sectors

“If there’s a default or failure of one scheme of the DCEP, the second tier institution is responsible for the purchasing power,” Zhou said. “If there is a bank run, it’s a run for the second tier institution, rather than the central bank.”

The second tier institutions will also be responsible for maintaining users’ privacy, although payment data will be backed up solely by the central bank.

“Our mandate is to build up a solid base of retail payments domestically, and [as for cross-border payment] we should focus on the current account payments, such as tourist sectors,” he said.

Mu Changchun, who leads digital currency research at the Chinese central bank, said in a subsequent panel discussion that introducing a digital fiat currency would help safeguard the monetary sovereignty of the central bank.

“At the same time, because of the popularity of private tokens or private crypto assets, you have to guarantee the public wider access to central bank money,” he said.

Source : Yahoo!

Read also at Reuters:

China’s $1.5 million digital currency giveaway impressed analysts. Shoppers, not so much . . . . .

China Drafts Law to Legalize Digital Yuan, Outlawing Competitors

Kevin Helms wrote . . . . . . . . .

China’s central bank, the People’s Bank of China (PBOC), has drafted a law to legalize the digital yuan and outlaw digital currencies issued by anyone else competing with it. Meanwhile, the central bank has been cracking down on gambling sites that use the stablecoin tether.

The People’s Bank of China published a draft law on Friday that gives legal status to its central bank digital currency (CBDC), the digital yuan. The central bank has also begun a public consultation on the draft law; comments can be submitted through Nov. 23.

“The legal currency of the People’s Republic of China is Renminbi [RMB],” the draft law states, adding:

RMB includes physical form and digital form … No unit or individual may produce or sell tokens, coupons and digital tokens to replace RMB in circulation in the market.

The proposed revision, translated by journalist Wolfie Zhao, adds: “For anyone that violates such regulation, the PBOC will halt such activities and forfeit any proceed from the making and selling of yuan-backed digital tokens and issue a fine that is up to five times of the involved proceeds.”

Nikkei Asia reported that “The bill also bans organizations and individuals from making or issuing digital currencies, apparently over concern that managing the money supply would become difficult if virtual currencies issued by the private sector circulate in the market. As a result, such cryptocurrencies as Libra, which has been proposed by Facebook, may not be allowed in China.”

Meanwhile, China has been heavily testing the digital yuan. A public test was recently launched in Shenzhen where the authorities gave away 200 yuan (about US$30) to 50,000 residents to spend at 3,389 stores.

Source : Bitcoin.com