China’s central bank digital currency (CBDC), also sometimes called DCEP or the digital yuan, is a back-up for the retail payment system and will co-exist with the incumbent traditional payment systems — including private platforms AliPay and WeChat Pay, according to Mu Changchun, director-general of the Digital Currency Institute of the People’s Bank of China.

E-payment giants AliPay and WeChat Pay hold 98% of China’s mobile payment market and have become an important part of the retail payment services sector. “If there’s something bad happens to them, either financially or technically, that will definitely bring a negative impact on the financial stability of China,” said Mu, who was speaking at a panel discussion on “Navigating the uncharted waters of retail CBDC” hosted by the Bank for International Settlements this week. 

“So in order to provide a backup or redundancy for the retail payment system, the central bank has to step up and provide CBDC services,” Mu said. The issuance of a retail CBDC will take a market-oriented approach, and “will coexist and cooperate” with paper money and e-wallets including AliPay and WeChat Pay in the retail payment system, he said. 

Motivations for launching retail CBDC

With the rise of cryptocurrencies such as Bitcoin and Ethereum, central banks around the world are exploring CBDC initiatives to safeguard their control over the implementation of monetary policies. “We curbed all the crypto assets trading in China to build this system in order to safeguard monetary sovereignty,” Mu said. Central banks, he added, should act to “avoid dollarization.” 

See related article: Fed Chair Powell calls Bitcoin ‘speculative,’ says US not in CBDC rush

China, which started work on its “Digital Currency, Electronic Payment” (DCEP) project in 2014, has been conducting mass trials of its digital yuan for retail use by the general public. Now officially renamed e-CNY, the digital yuan’s official launch is believed to be imminent.

Mu outlined China’s other key motivations for launching its CBDC project: to provide a backup or redundancy for the retail payment system, enhance the efficiency of payments systems, and improve financial inclusion.

On improving financial inclusion, Mu said that China’s retail CBDC enabled people living in remote areas to open digital wallets with just their mobile phone number, without the need for traditional bank accounts, and enjoy access to basic financial services. 

An offline mode also allowed people without network coverage to make payments using the retail CBDC. He added that the app had been designed to be user-friendly and mobile payments could be made by scanning QR codes or a touch-and-go function.  

Once it is launched, China’s digital yuan will be a two-tier system: The first tier is the central bank that issues the retail CBDC to the second tier — which comprises commercial banks, payment service providers and other private sector and financial institutions — that will in turn issue or exchange the digital yuan with the general public.

Cooperating with the private sector is “very valuable” said Mu, who added that the private sector — including banks, telecommunications operators, chip makers, mobile phone makers, algorithm companies, and artificial intelligence companies — all contributed a lot to the development of China’s digital currency. 

Proposed principles for cross-border CBDC arrangements

As more countries launch their own CBDC initiatives, cross-border use of CBDCs will need to be considered. Mu shared several key principles to guide CBDC cross-border payment collaborations: 

  • A digital currency supplied by one central bank should not impede other central banks’ ability to carry out its mandate for monetary and financial stability.
  • Cross-border payments with CBDCs should comply with the regulations and the laws of jurisdictions concerned, such as capital management and foreign exchange mechanisms, and information flow and fund flows should be synchronized so as to facilitate the monitoring of transactions by regulators for compliance.
  • The arrangements should improve the transparency of cross-border e-commerce and address regulatory painpoints in anti-money laundering (AML) and countering the financing of terrorism (CTF) compliance, customs and tax declaration, and capital management. 

Mu also called for interoperability between CBDC systems of different jurisdictions and the processing of CBDCs between different digital wallets, and the establishment of a scalable foreign exchange trade platform supported by technology, such as the digital ledger technologies.

China is currently collaborating with the United Arab Emirates, Hong Kong and Thailand, together with the Bank for International Settlements Innovation Hub in Hong Kong on a “Multiple CBDC Bridge” (m-CBDC Bridge) project to explore using distributed ledger technology to support real-time cross-border payment transactions on a 24/7 basis. 

See related article: 4 central banks and BIS exploring CBDC bridge for Asia and Middle East

Speaking at the 2021 China Development Forum earlier this month, Mu sought to assuage data privacy concerns about the digital yuan, according to a Securities Times report. He explained that the “controllable anonymity” feature of the digital yuan allowed for the protection of the public’s personal information and need for reasonable anonymous transactions, while at the same time, complying with AML/CTF requirements. The protection of user privacy by digital yuan was the highest among the current payment tools, Mu said.