China’s CBDC ‘Dress Rehearsal’ Sets Stage for Other Central Banks

For digital currencies, as goes China, so will go the world?

China, as is well-known, is in the midst of pilot programs tied to its digital yuan — offering both roadmap and competitive blueprint, of sorts, for other nations in the midst of their own central bank digital currency rollouts, including the United States.

As reported headed into the end of the year, the People’s Bank of China (PBOC) has successfully concluded its second central bank digital currency (CBDC) pilot program, with an eye on rolling out the digital currency to the masses. In that trial, 20 million digital yuan (roughly a $3.1 million dollar equivalent) was issued to 100,000 residents, chosen by lottery, in the city of Suzhou. That meant that each of those residents got 200 yuan to spend, digitally, online or offline with participating merchants.

Here, we’re starting to see some scaling. And scale, obviously, is key in getting any new payment offerings more widely adopted, which changes consumer behavior in the process. As noted, the Suzhou pilot was a larger, and, we contend, a more ambitious one than an earlier pilot conducted in October in Shenzhen. In Suzhou, there were twice as many residents and three times as many businesses involved in the December pilot. In terms of mechanics, the latest digital currency trial involved a “new” electronic payment feature that lets users transact without an internet connection via tapping one’s device at the point of sale.  The digital interaction, noted The Wall Street Journal, also features a digital “replica” of a yuan note tucked into consumers’ digital wallet apps — and payments are done through scanning QR codes.

A number of marquee names are on board with the digital yuan as a unit of commerce and currency, including Meituan and Didi Chuxing.

Notably, the digital currency offered by China’s central bank does not carry transaction fees, which sets that payment activity apart from those done through, say, Alipay, WeChat Pay and Chinese banks.  It could be the case that this competitive advantage sets the stage for wider adoption of the digital yuan when it is rolled out nationally and also spurs mainstream payments players to reduce or eliminate their transaction fees, in a bid to keep pace and customers. Increasingly, in the great digital shift that heralds a decline of cash, the private sector and the public sector will butt heads.

Taken as a market all its own, China’s grand experiment in CBDCs also has the potential to “freeze” out foreign companies (Visa and Mastercard among them) that have long sought to gain a foothold in an economy where $27 trillion of payments beckon.  Late last year it was announced via state media, and recounted by ledgerinsights.com, that UnionPay is working with China’s central bank digital currency (CBDC) trials to test offline and offline payments — using existing infrastructure.

Creating The Digital Fiat Ecosystem

Bit by bit, then, the Chinese efforts involve the central bank controlling and tracking digital fiat, using its own direct issuance and existing card networks — a melding of regulators and rails. To be sure, the card networks, such as Visa, have published research and technical papers aimed at enabling point to point CBDC payments and have pledged to work with central banks to enable CBDC.

Building out what might be arguably termed a “digital fiat ecosystem” — trial by trial, merchant by merchant, leveraging established ecosystems (private sector banks, after all, intersect and interact on the card networks) — is tantamount to a dress rehearsal that may help steer other central banks’ CBDC efforts.

Though there are other countries that have made progress with digital fiat — the Bahamas comes to mind with the recent debut of the Sand Dollar — the effort to bring CBDCs to various domestic markets remains a nascent one. The U.S., for example, is working with MIT To build and test a hypothetical digital currency.

The Bank for International Settlements (BIS) has estimated that about 80 percent of more than 60 central banks queried are working on digital currencies.  The roadmap may be, at a high level, easy enough: Perfect the domestic corporate and consumer use cases, and then create a global stage for the interaction of those various CBDCs — for cross-border trade, for example (indeed, the Fed and seven central banks have put forth a framework for CBDC development and issuance).

Speed, of course, is top of mind, too — in an age where the digital dollars and yuan and other currencies may be especially valuable in times of crisis, of stimulus payments and where going to the ATM or waiting for a paper check just are not feasible options.

With instant payment schemes in place, using new platforms to get digital fiat into digital wallets (even though, for now, initiatives like FedNow, the instant payments push, is separate from digital dollar exploration) will likely be easier. As PYMNTS research has shown, three out of 10 consumers say that having access to real-time payments is one of the most important features they look for in financial institutions. As many as 50.7 percent of millennials believe it is “very” important to receive payments in real time.

The timeframes might be staggered, the central banks’ approaches may differ, but 2021 may show marked progress on the CBDC front, with China’s relative head start a key tailwind that is global in scope.