This is not the first time I have brought up the subject of the digital yuan and CBDC. Each time this topic raises more and more controversy and challenges around itself. In the new blog, I want to delve into the roots of e-CNY and understand the threats it poses for China’s tech giants. It is just the right time to consider the topic while China is calling on private sector leaders Ant and Tencent to help develop a government-backed digital currency. It is worth noting that such a currency is a threat to the Ant and Tencent pair, and here’s why. I am telling you in three parts.
Part 1. In 2019, the People’s Bank of China announced the national cryptocurrency and launched its testing. 4 state-owned banks and 3 major telecommunications companies have begun to develop strategies for the most efficient use of the digital yuan. However, the largest digital payment providers — Alipay and WeChat Pay — were not brought in the testing.
Part 2. And in July 2021, the People’s Bank accelerated testing of its digital yuan, embarrassing the operators Alipay and WeChat Pay: the state called on market leaders to help develop the CBDC. Companies have no choice but to get involved, despite the risk of undermining their own user bases that they have built over the years. Most of China’s 1.5 billion people use at least one private service to make mobile payments.
In July 2021, it became known from a document published by China that the electronic yuan is being developed mainly for domestic retail payments. China needs a “more convenient, secure, inclusive and privacy-friendly” payment service, as well as a payment infrastructure that is compatible with different platforms. The released document does not mention the names of Alipay and WeChat Pay, but it does note a decrease in the use of cash throughout the country, which is a result of the dominance of two networks. Ever since Alipay and then WeChat first introduced digital payments more than a decade ago, the population has come to rely on mobile payments, virtually abandoning cash in some major cities.
Part 3. Recently, the People’s Bank of China announced that e-Yan will be distributed through approved commercial banks and non-bank payment companies. However, China gave state banks a head start in digital yuan pilot projects by using them to test e-CNY wallets in early 2021. Ant’s MYbank and Tencent’s WeBank later became participants, but so far these two virtual banks have not been allowed to conduct full tests like state banks.
It is risky for Ant and Tencent to encourage the development of e-CNY, but it is even more dangerous to remain on the sidelines. Companies really have no choice but to collaborate with the project. The central bank did not say if Alipay will be officially recognized as the e-CNY wallet operator, although Ant spent months testing e-CNY with tens of thousands of its employees. In February, all Chinese citizens working for Ant and its subsidiary Alibaba were brought to the process of testing digital currency. Using digital wallets built into the Alipay app, employees made purchases with e-CNY at dozens of eateries, vending machines and retail stores on campuses of the two companies in Hangzhou and other cities in China. Employees could also use digital yuan withdrawn from government bank accounts or MYbank to pay for some online services and goods.
The digital yuan pilot has raised concerns among some employees that Beijing is beginning to dismantle the Ant mobile payment system, which is used by more than a billion people in China. These fears and the company’s determination to continue testing show that Ant is caught between a rock and a hard place.
It can be assumed that a successful e-yuan will reduce the dominance of Alipay and WeChat Pay. The central bank said that e-CNY and other electronic payment methods are both complementary and different from each other, with the biggest difference being that e-CNY is legal tender. Therefore, it is not yet known whether there will be healthy competition in the market with such statements by the PBC.