Do believe the hype: the People’s Bank of China (PBoC) used Hong Kong Fintech Week to reveal further details of its Digital Currency Electronic Payment (DCEP) project. Rumours have swirled over the last few months about the PBoC’s blockchain-based cryptocurrency or 'stablecoin', and while we still don’t have a concrete timeline, the project is starting to take shape:
Stated objectives
- Safeguard the RMB against a flight to Libra or another non-central bank digital asset.
- Provide currency for mobile and electronic payments.
- Prevent the fragmentation of mobile payments and provide a new universal payment instrument.
The digital currency will be aimed at the Chinese general public – from China’s remote rural areas to its hyperconnected cities. DCEP will provide an alternative mobile payment method to WeChat Pay and AliPay (which currently account for 96% of mobile payments in China) and could help limit the fallout if one or both of the ‘Big 2’ become unavailable for any reason.
Technical details
- The PBoC will operate DCEP using a 2-tier, fractional-reserve system.
- The mobile wallets used to pay and receive DCEP will initially be linked to commercial bank accounts, although the mobile wallet and bank account may ultimately be ‘decoupled’ so that DCEP can be opened up to tourists without a local Chinese bank account.
- The aim is for mobile wallets and digital currency to substitute physical RMB notes and coins - ie to replace 'M0', as opposed to 'M1-3' (bank deposits) or 'MB' (central bank money).
- The digital currency will not be interest bearing.
Why this matters
Despite a theme of Fintech Week being how fintech can help businesses cross borders, the PBoC’s announcement highlights how fintech can contribute to the development of markedly different financial ecosystems in different jurisdictions. On the same stage as the PBoC revealed how much work it had done to create a central bank digital currency (CBDC) to remedy risk areas in its payment system, Hong Kong and Thai central bankers argued that their domestic payment systems did not present any issues that a CBDC could fix. Fintech offers a range of tools that could harmonise or exacerbate existing differences between national systems, and it is becoming more and more crucial that international businesses keep on top of fintech developments around the world. Please get in touch with us to discuss how we can help you navigate the current and future landscape.
As for CBDCs, it remains to be seen whether any other central banks follow the PBoC’s lead, but with the world’s most populous country being used as a testing ground, CBDCs are certainly getting quite an introduction.
