The digital Yuan will set the trend of CBDC

In April, the Chinese government announced at Boao Forum that the digital yuan beta test thus far shows that the issuance and distribution mechanism of the digital yuan is compatible with the existing financial system, and more cities will be added to the pilot test area. There is a report that the Ant Group’s MYbank was quietly added as the seventh digital yuan issuer. These two developments indicate the initial phase of the digital yuan beta test started in October 2020, met the initial target, and the country is moving into an expanded beta test. The country is inching closer to a full rollout of its long-anticipated central bank digital currency (CBDC).
The Chinese digital yuan, officially known as e-CNY or DC/EP (digital currency/ electronic payment) and popularly known as e-RMB, is the sovereign central bank digital currency (CBDC) issued by The People’s Bank of China (PBOC).

When the digital yuan started its initial beta test, only the six largest banks in China were involved: ICBC, China Construction Bank (CCB), Agricultural Bank of China (ABC), Bank of China (BOC), Bank of Communication and Postal Savings Bank of China. Ant Group’s MYbank has now been added as the seventh e-CNY issuer, and Tencent’s WeBank will likely be activated soon. These two banks’ inclusion as e-CNY issuer will bring Alipay and Wechat pay into the e-CNY ecosystem. These two payment platforms have over 90% of China’s mobile payment market now. Their participation in the e-CNY payment system means complete nationwide coverage of the retail e-CNY payment addressable market.

The initial e-CNY digital wallets can be bundled with a dozen popular apps, including Meituan,, Didi and Bilibili, but conspicuously cannot be linked to WeChat Pay or Alipay. That means none of the participating banks can transfer e-CNY between their digital wallets and the two established payment platforms.  The participation of Alipay in the e-CNY test has made a digital yuan module available for some white-listed AliPay users. These invited users can now activate a digital yuan wallet from Alipay mobile payment app, send and receive transactions after topping up balances from linked bank accounts.
 The Chinese government promised to allow international visitors in the February 2022 Beijing Winter Olympics to use e-CNY during their stay in China. Many people believed that the Chinese government would likely launch e-CNY around early 2022 and do it on a city-by-city basis.

The central banks worldwide closely watch how PBOC set up the e-CNY system, handles the new payment system’s enormous technical challenges and resolve the monetary policy issues arising from introducing this novel form of money. China’s success in mobile retail payment had caught the world’s attention and instrumental in pivoting the country’s ascendancy in e-commerce.
A successful debut of e-CNY on the scale of China will catapult the country to the forefront of payment fintech. It will provide developing countries with a practical blueprint in rolling out their respective CBDCs. The proliferation of digital cryptocurrencies and peer pressure from looming CBDCs launching of neighbouring countries have made CBDC a priority project for many central banks globally.
A discussion on the setup of the e-CNY helps to assess its prospect on debut.

How e-CNY works
The Chinese central Bank adopted the hybrid two-tier architecture in the operation of e-CNY. The two-tier system keeps commercial banks in the payment system and not dis-intermediating them in the disruptive payment system change. The e-CNY is a cash-like direct claim on the PBOC, and the agents manage customers facing activity as shown in the diagram; it can replace cash & debit card in transactions.

Figure: RMB users are dealing with PBOC agents and not directly with PBOC

The agent bank has a digital wallet account funded by e-CNY with PBOC. The retail customer will open their e-CNY mobile-based electronic sub-wallet through app download with the agents of the PBoC. The sub-wallet is linked to an account of the retail customer with the agent. The agent bank will perform know-your-customers (KYC) duty under the law, similar to what the banks are doing now under current law.

The e-CNY users scan a Q.R. code at payment terminals to complete transactions. Transactions of different sub-wallets under the same agent can be settled in-house. For transactions between sub-wallets opened at two different agents, the real-time gross settlement (RTGS) system will be used between the two agents. The e-CNY works in real-time, and user experience should not differ from an e-wallet like Alipay today.
The e-CNY considered cash like M0 direct liability of PBOC; transactions using e-CNY do not pay a processing fee to the agent during experiments on e-CNY. How the agent is compensated for setting up the extensive processing system running 24/7 is an issue for the official launch.

The e-CNY can be used offline mode, and the transaction record will be updated once the communication link is restored. The offline usage is an improvement over the current e-wallet set up that needs a communication connection to work. This feature improves the payment system’s robustness during an unexpected power outage and allows e-CNY to resemble the anytime, anywhere usage feature of cash closely.
The agent will submit asynchronously but regularly all transaction records to PBOC. The submission allows PBOC to perform its prudential monetary supervisory function and anti-money laundering (AML) work against terrorist funding, tax evasion and other money laundering criminal activities. The information submitted is within the power that the PBOC enjoys under existing AML rules and not expanding the power of PBOC over bank secrecy and data protection.

The principle of “controllable anonymity” is used in handling sub-wallet transactions. There would be several digital wallets grades based on the KYC levels’ strength, with more robust KYC requirements associated with higher transaction limits. Limits would generally be linked to existing rules of use of cash; details have, however, not yet been established. During the test period, no counterparty information is revealed in transactions, and users remain anonymous to each other, the same as cash used in a transaction. The e-CNY is designed for retail use and mimicking what the payment platform works today. There are few privacy issues raised today, and e-CNY should not raise the privacy question too.  There is little risk of fund migration to an e-CNY account as the said account is not interest-bearing, and existing rules over the daily limit of fund transfer to payment platform are likely to stay.

The e-CNY user-facing interface is customer-friendly, and the product design is inclusive

In the beta test of e-CNY, users now have three methods to participate in the e-CNY test: an e-CNY card-based hardware wallet, a standalone e-CNY mobile app without log-in, and the in-app e-CNY wallet from participating banks or AliPay with log-in.

The multiple access format allows offline usage of e-CNY and facilitates currency usage in a signal weak rural area. The card-based wallet design resembles a debit card and helps the computer illiterate to use the e-CNY. The e-CNY design is the most inclusive among all CBDC being discussed now.

For the more popular in-app e-CNY wallet from participating banks, a typical in-app from ICBC e-CNY wallet enables four major functioning modules: deposit balances from linked bank accounts, withdraw balances to bank accounts, payment QR code and initiate peer-to-peer transactions.

ICBC’s new wallet user interface also contains an educational video and an FAQ sub-page. The educational video highlighted that the strategic purpose of the e-CNY is to “proactively react to the shockwave brought by global private cryptocurrencies towards sovereign currencies” and “to maintain the order of the financial markets.”
The adoption of a universal QR at the end of 2021 in China means that the e-CNY app will work on all QR based transactions by the time it is officially launched.

Although e-CNY is a revolutionary product in the history of money, its customer interface resembles that of the existing payment apps and easy for users to adopt. The multiple inclusive formats will be attractive to many developing countries.

e-CNY runs on mature technology and meets scalability, transaction cost and real-time requirement of an efficient payment system

The system is run on a traditional centralized database setup. The user account operation design is value-based and account-based. By not following the much-hyped distributed ledger technology (blockchain) and token approach that some central banks used in their initial study of CBDC, PBOC sidesteps the critical issues of scalability, transaction cost and real-time requirement as the following two tables prepared by Deutsche Bank in February 2021 show:

e-RMB300000Bitcoin Cash65
FB- Libra80000Litecoin56
Table 1: e-CNY can handle more simultaneous transactions

There is no public information over comparable power consumption per transaction figure of e-CNY. Still, it should be significantly lower than 0.00649 as the transaction is mainly on the customer-facing end, similar to mobile payment in use today. Current mobile payment power consumption is in the magnitude of 0.00001kwh/transaction.

MediumkWh consumption per transaction
Visa (USD)0.00649
Mastercard (USD)0.00649
FB Libra0.00649
Cash (euro)0.08 per printed banknote
Bitcoin Cash18.957
Table 2: Power consumption of comparable payment system

Keeping the agent banks fronting the customer in the two-tier setup makes the agent responsible for developing its in-house real-time risk protection and intervention techniques. PBOC said in late March that the existing two dominant mobile payment platform, Alipay and WePay, will co-exist with the e-RMB for a long time.
The e-RMB is legal tender, and the buyers and sellers should not pay any fee in using it. However, the agent needs fee income to run and improve their system; this dilemma can be resolved if the agent can offer value-added service to levy charges to the sellers or the PBOC provide a service subsidy to the agent.  The increase in the number of agent banks providing payment service from the two current dominating ones means everyone must race to provide the best service at the lowest cost to win users.
The current Chinese leader in mobile payment, AliPay, has performed in system robustness. Jack Ma mentioned in a Forbes conference in November 2019 that the company is the target of some 300 million cyberattacks per day, with the majority presumably on Alipay. Alipay processed US$50 billion worth of transactions per day; its AlphaRisk AI-enabled real-time risk engine succeeded to control fraud loss to under 0.64 in 10 million, which means that for every $10 million worth of payments, fraud induced loss is less than $0.64. The loss is significantly lower than the global industry average and claimed among the best-in-class.

The e-CNY can easily upgrade to go international and wholesale

We noted that by tiering different KYC requirements, the transaction amount could increase and move to the wholesale level.

Four Chinese financial institutions, including China’s cross-border interbank payment system, Payment and Clearing Association of China, Digital Currency Research Institute and the Clearing Center of the Central Bank, set up a localized data warehouse called Finance Gateway Information Services Co. Ltd. with the dominant global cross-border handling agent, SWIFT in January 2021.  The company aims to improve domestic connections with the global cross-border financial messaging system, ensure data security and compliance with domestic regulations, particularly for promoting the use of e-CNY across borders. One should note that e-CNY offers an attractive economic proposition to retail cross-country small users. The transaction fee for such transaction now runs at 3-7%, and it can be significantly cut if run on the e-CNY platform. The potential for using e-CNY as a conduit for cross-border payment and alternatives to the dollar for China-related retail transaction provides a ready market.

e-CNY will set the trend of CBDC if it meets robustness challenge
The e-CNY build on China’s extensive experience on mobile payment and adopt a pragmatic and friendly approach to its setup. It will set the trend of CBDC if it can meet the sometimes unpredictable information system attack challenge after rollout. For a critical system such as payment, system reliability and robustness are critical.

Dr Henry Chan
Senior Visiting Research Fellow
Cambodia Institute for Cooperation and Peace, Cambodia
May 2021