China in Focus
E-CNY: Development and Impact
E-CNY: Development and Impact   <br/>數字人民幣:發展與影響

The E-CNY, issued by the People’s Bank of China, is a significant step in the development of digital currencies around the world. Following the mass retail test of E-CNY in a number of pilot areas, the electronic RMB is moving closer to a full launch.

Market users will likely focus on its safety and development. So, what is the E-CNY? Is it different to WeChat Pay and Alipay? Will E-CNY replace cash? With these questions in mind, let’s explore the development of E-CNY and its likely impacts.


What is E-CNY?

E-CNY is a sovereign digital currency issued by the People’s Bank of China (PBOC), China’s central bank. Its value will be as stable as the physical yuan, and it is designed to replace physical cash in circulation (known in central banking parlance as M0). 

In practice, commercial banks and electronic payment companies will deposit 100% worth of reserves at the central bank in exchange for digital currency, which they can then distribute to retail users. 

In the first tier, the PBOC will issue E-CNY to authorized agencies such as the big four state-owned banks and other institutions such as Tencent and UnionPay. In the second tier, these authorized agencies will distribute to end users such as companies and individuals. Instead of using bank accounts, E-CNY will be stored in electronic wallets that can transfer E-CNY without needing to access the internet. 

The PBOC has not yet published an official white paper on the E-CNY infrastructure. However, it is possible to achieve “controllable anonymity” such that all transactions are only visible to PBOC and not in the other layers. 

E-CNY can be seen as a digital payment that has equivalent value to other forms of the yuan, such as bills and coins. E-CNY can be transferred without relying on a bank account. During a transaction, it simply verifies the value of the E-CNY, instead of verifying the account holder’s identity. Compared with bank savings, the biggest difference is that holding E-CNY in a digital wallet won’t accrue any interest.

Based on these features, we can understand the E-CNY as simply an electronic version of cash. The central bank’s role is mainly to make changes to the currency’s physical form, distribution and payment framework. 


Motivations behind E-CNY

With changing technology, the form money has taken has moved from goods and commodities to metal and paper to electronic currencies. And the underlying value is no longer limited to monetary metals, but extends to credit money and high-liquidity financial assets. 

Over 80% of 66 central banks around the globe are exploring the use of central bank digital currencies (CBDC), according to the Bank of International Settlements (BIS) statistics. These 66 countries cover 75% of the world’s population and 90% of economic outputs. However, none have fully launched yet, so E-CNY makes China a pioneer in exploring the use of CBDC.

China has become the biggest digital payment market in the world. A PBOC report showed that, in 2020, the volume and amount of mobile payment business increased by 21.48% and 24.5% year-on-year, respectively. In 2019, the adults who used electronic payments accounted for 85.37% of the total users, an increase of 2.98% over the previous year. 

The fast growth in mobile payments has aided in economic development and involved social changes. It is now entering the mass adoption phase. Meanwhile, the Covid-19 pandemic has accelerated the evolution of the “no-cash economy.”

The growth of the digital economy and virtual trading have fueled the development of digital currencies around the world. In the past 10 years, Bitcoin and other decentralized currencies have become widely accepted. But we can see that Bitcoin is very volatile because it has no fundamental price to fall back upon. Other cryptocurrencies in development maybe more stable. 

The growth in use of such private digital currencies could replace the sovereign currency, or even threaten monetary sovereignty, in a foreseeable future.  

The high costs of cash management and money laundering risks are the internal motivations of the PBOC in introducing the E-CNY. Using digital currency cuts the cost of producing banknotes and coins. Its “controllable anonymity” can also effectively prevent money laundering, tax evasion, terrorist financing and other financial crimes, and help central banks to manage currency circulation and macro-economic operations. 


Impact of E-CNY

E-CNY will bring positive change to the operations of traditional commercial banks. The digital currency can conduct end-to-end value transfer without bank accounts, reducing dependence on financial intermediaries and achieving “controllable anonymity.” It may even boost earning potential for commercial banks since they, as the operator of E-CNY mobile wallets, can offer other value-added services. 

In the long run, commercial banks will be able to leverage technologies such as blockchain, biometric identification and big data to manage their customers’ financial data, helping to drive further innovation in the financial industry. 

E-CNY will bring challenges to third-party payment agencies. Features of the popular WeChat Pay and Alipay include low cost and convenience, which will also be achieved by using E-CNY. The current costs for mobile payment is very low, but PBOC has said that payments and transactions in the future should be free of charge. 

Not to mention that the central bank’s digital currency can be used in the mobile wallets of PBOC and also of commercial banks. When the E-CNY is officially launched, it will probably occupy the current market share of third-party payments. 

Since the E-CNY aims to replace physical cash in circulation in the short term, its impact on the RMB exchange rate will be minimal, given that digital payments are already prevalent in China. In the long run, as E-CNY could help advance the internationalization of the RMB, the RMB may appreciate, given higher external demand, especially against the currencies of countries along the Belt and Road Initiative. 

However, since it will be easier for the central bank to monitor the two-way capital flow under the E-CNY, the PBOC is unlikely to allow sustained volatility in either direction.

E-CNY could promote the internationalization of RMB, especially in the areas where its growth is highly dependent on trade with China. E-CNY’s peer-to-peer transactions could help to reduce cross-border settlement costs and remove the restrictions levied by correspondent banks with disparate systems. The adoption of CBDC in other countries could further increase the convertibility between E-CNY and other currencies while bypassing correspondent banks.


Kera Kong, Strategic Planner, RMB Business Division, Bank of China (Hong Kong) 


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