China’s central bank has spelled out terms for the latest progress in its development of a state-backed digital currency as it continues to push ahead with trials of the e-CNY, as the currency is known. Many believe China is trying to widen adoption of the digital money in time for the Beijing Winter Olympics in February.
The People’s Bank of China confirmed in a white paper released on Friday that it had been using smart contracts to “make the e-CNY programmable, more expandable, and better integrated into various scenarios.”
The bank said that e-CNY would obtain programmability from “deploying smart contracts that don’t impair its monetary functions” and which could “facilitate business model innovation.”
The bank, however, did not clarify what kinds of innovation could follow for the adoption of smart contracts.
At a briefing following the release of the white paper, PBOC Deputy Governor Fan Yifei told reporters that many local governments had used smart contracts for e-CNY giveaways to stimulate consumption, and that through collaboration with certain mobile phone makers, the bank had studied dual offline payment and other innovations on mobile devices.
The adoption of smart contracts, however, could be managed in a more cautious manner. Mu Changchun, director-general of the PBOC’s Digital Currency Institute, said in 2019 that central bank digital currencies could be loaded with smart contracts, although smart contracts could degrade CBDCs to just value coupons if they functioned beyond the role of a currency, potentially jeopardizing the internationalization of the yuan, according to a report by the government-controlled Xinhua News Agency.
“We’ll add smart-contract features that are of benefit to serving its role as a currency, but we hold a more prudential stance toward smart-contract functions beyond that,” Mu said in 2019.
Internationalizing the yuan
There have also been discussions in the industry surrounding the e-CNY’s role in the internationalization of the yuan. Zhiguo He, a University of Chicago Booth economist, told Forkast.News last year in an interview that if successful, e-CNY could act as a way to achieve greater internationalization of the yuan, but that China’s strict capital controls could obstruct its goal of internationalization.
The latest white paper, however, said cross-border payments involved various complicated issues, such as monetary sovereignty, foreign exchange policies and arrangements, as well as regulatory and compliance requirements.
“Though technically ready for cross-border use, e-CNY is still designed mainly for domestic retail payments at present,” the PBOC said in the white paper, adding that the internationalization of a currency was a natural result of market selection.
The central bank also said that the international status of a country’s currency “depends on its economic fundamentals and the depth, efficiency and openness of its financial markets.”
Mu, commenting on the cross-border payment use of CBDCs, said in March that a digital currency supplied by one central bank should not impede the ability of other central banks to carry out their mandates of monetary and financial stability.
Mu also reiterated at the Friday briefing that e-CNY would co-exist with traditional electronic payment tools.
“E-CNY and existing electronic payment tools are in different dimensions. They complement each other, and also differ,” Mu said.
“Defined as a substitute for M0 [the monetary base, which equals coin currency, physical paper and central bank reserves], e-CNY mainly serves retail payment. Its issuance aims at enhancing financial inclusion,” Mu added.
Da Hongfei, CEO of blockchain tech startup Onchain, told Forkast.News that the progress of internationalizing the yuan would be associated with the internationalization of Chinese goods and services, and that China’s industrial development would determine how much e-CNY could drive the internationalization of the currency.
Matteo Giovannini, a senior finance manager at Industrial and Commercial Bank of China, one of the country’s largest commercial banks, told Forakst.News that the internationalization of the yuan would not happen overnight, and that it would follow China’s growth trajectory on international capital markets, global trade and financial opening up.
Trial by transport
As the PBOC tests the stability and user-friendliness of e-CNY, millions of people in China have been granted the opportunity to try the new technology.
The white paper said e-CNY trials had seen nearly 21 million personal wallets opened and transactions worth a total of around 34.5 billion yuan (US$5.3 billion).
Some Chinese cities have adopted e-CNY for urban transport networks, marking the first steps in its wider introduction. Public transportation operators in Beijing, Chengdu and Suzhou are now accepting digital yuan payments.
Giovannini said the Olympics represented an important opportunity for the government to showcase the latest developments in its digital currency to the rest of the world, especially as it was designed to have foreign visitors and athletes test it by simply downloading an e-wallet without the trouble of opening a local bank account.
In the white paper, the central bank reiterated its opposition to cryptocurrencies and stablecoins.
“Given [cryptocurrencies’] lack of intrinsic value, acute price fluctuations, low trading efficiencies and huge energy consumption, they can hardly serve as currencies used in daily economic activities,” the PBOC wrote, adding that their speculative nature could pose potential risks to financial security and social stability.
The PBOC also noted that some commercial institutions plans to launch global stablecoins would “bring risks and challenges to the international monetary system, payment and clearing system, monetary policies,[and] cross-border capital flow management.”
The PBOC’s views reflected in the white paper echoed what Fan has said in the past. The bank’s deputy governor said earlier this month that stablecoins could bring risks and challenges to international monetary mechanisms and clearing systems.
“We’re quite worried about this issue, so we’ve taken some measures,” Fan said at the time, without elaborating.