Chinese digital RMB e-CNY is about to change the global Fintech Industry.

As China takes measures to open financial markets, the Chinese Yuan is becoming a more important global currency. According to the Bank of International Settlements (BIS), the Chinese Yuan will account for 7% of all trades in 2022, up from 4% three years ago, and total daily trade will increase to $7.5 trillion, up from $7.5 trillion. The yuan surpassed the Australian, Canadian, and Swiss currencies to become the world’s fifth most-traded currency. In contrast, the US Dollar, Euro, Yen, and British Pound remained in the top four.

The BIS collects information from over 1,200 banks and dealers in 52 countries. In the report, Dubai was included for the first time this year, but Russia was excluded due to sanctions.

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▲The Chinese currency accounted for 7% of overall transactions, up 2.7 percentage points.

Many financial firms, including Goldman Sachs, Citigroup, and other experts, predict that by 2030, the Chinese yuan will be the third most utilized currency in international payments as a reserve currency, overtaking the yen and the pound. In the second quarter of 2022, the world’s central bank reserves comprised 59% US dollars, 20% euros, 5% yen, 5% pounds, and 3% yuan.

According to analysts, the yuan is unlikely to challenge the top two dominant worldwide currencies since financial maturity and capital account openness is more essential than a country’s GDP size regarding a currency’s dominance in global use. Nonetheless, creating the Chinese digital currency E-CNY may accelerate the push for RMB internationalization by competing with and undermining the US dollar and euro hegemony.

What is E-CNY, and why does it matter?

In 2014, China began investigating the possibility of developing its digital currency. The People’s Bank of China (PBOC) announced in 2016 that it had built a prototype digital yuan, tested in pilot programs in Shenzhen and three other cities in early 2021. More than 20 million personal digital wallets and 3.5 million commercial wallets will have been implemented by mid-2021. The digital yuan has been used over 1.2 million times, including paying for public transportation, shopping, and accessing government services. By the end of this period, the total number of transactions is expected to exceed 70 million e-CNY.

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▲The Chinese government distributed 40 million digital yuan in June 2021 through a lottery in Beijing to incentivize citizens to use digital currency. Residents could sign up through two banking applications, thereby participating in a draw for one of the 200,000 ‘red envelopes’ containing 200 e-CNY (digital yuan, about €28), which they could spend only at selected stores. This enabled China to test the digital currency on a larger population sample.

Among the fascinating payment methods available for the digital yuan are barcode payments, tap-and-go purchases, offline payment choices, and face recognition authentication.

Here is the list of some E-CNY Features, Present and Future

1. You can make transactions without the internet.  Unlike Alipay and Wechat Pay, the digital yuan can make transactions without Internet access by tapping phones, smart watches & other devices together. This could be the digital yuan’s most attractive feature, as it gives it an advantage over other traditional mobile payment methods and helps imitate properties similar to cash.

2. No Charges for Exchange and Circulation. Because there are no fees for exchanging and circulating the digital yuan, it is less expensive than other electronic payment methods. Unlike cash, the digital currency does not accrue interest. It is designed to be loosely coupled with bank accounts, which means payments made using digital currency are settled immediately.

3. No KYC (for small transactions). The digital yuan allows different degrees of anonymity depending on the transaction amount. Small-value transactions may be done using wallets without knowing your customer (KYC), but large-value transactions necessitate KYC. Small payments can be made using anonymous wallets tied to cell phone numbers. Consumers must go through KYC verification procedures to undertake large-amount digital yuan transactions. It is necessary to define what comprises small and large transactions.

4. Anonymity is not guaranteed. According to the Peoples Bank of China (PBoC), “the e-CNY system gathers less transaction information than traditional electronic payment and does not share information with third parties or government agencies unless required by laws and regulations.”

5. Send money overseas, To Be Developed (TBD). China’s digital yuan may also have qualities that make it easier to utilize in foreign transactions and more appealing to own when compared to traditional currencies. For example, depending on the digital yuan’s acceptance network, it may be possible for its inhabitants to send money overseas without using the present traditional payment infrastructure of correspondent banking. Citizens will rely on something other than expensive commercial banks or messaging systems such as SWIFT to make cross-border payments.

Over time, e-CNY will become the dominant form of retail settlement, and most personal financial transactions will be conducted with it.

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▲During the Winter Olympics in Beijing in 2022, the digital yuan was offered as a payment option for the first time to foreigners without a bank account in China. The digital yuan was used more times than the Visa inside the Olympic Village on the opening day of the Olympic Games.

E-CNY Impact on Overseas Investments & Trade

Most issues with any international financial transfer are caused by the high number of intermediaries engaged in the transaction. Because of the number of intermediaries involved, such as correspondent banks, cross-border transfers necessitate changes to numerous ledgers and additional communication hops in the payment message to undertake due diligence, raising the cost and speed of cross-border transactions. Furthermore, liquidity management in foreign currency is costly in cross-border operations.

The new digital yuan provides a chance to develop a scalable paradigm for global commerce and service payments by making it simpler and cheaper to transfer money from any place in the globe to anywhere else in the world. Due to the digital nature of the yuan, China could readily distribute it through pre-existing payment networks such as Alipay and WeChat Pay wallets. This boosts the digital yuan’s scalability since it can ride on existing, well-established current acceptance infrastructure.

Other Countries Joining Digital Currency Race

Central banks worldwide are looking at new ways to issue digital currency, often known as central bank digital currencies (CBDCs). According to BIS, 80% of central banks are establishing local CBDCs, as many central banks believe that digital currency has the potential to increase payment efficiency and security for both domestic and cross-border transactions.

In Europe earlier this year, the European Commission announced that a “Digital Euro” legislation would be released at the beginning of 2023. According to EU Financial Services Commissioner Mairead McGuinness, the law permits the European Central Bank (ECB) to initiate technical steps for creating a virtual version of a Euro. The ECB is already testing digital euro designs and systems, with a prototype due by the end of 2023. Following that, if Eurozone governors believe it is “worth the effort,” the digital euro might be ready by 2025. 

The United States is also considering the development of digital USD. On Tuesday, New York’s Federal Reserve Bank announced that a consortium of major financial institutions, including Citigroup Inc., HSBC Holdings, MasterCard Inc., and Wells Fargo & Co, would run a 12-week digital dollar pilot program. 

Our Take: China’s e-CNY will serve as the technological foundation for most transactions between the People’s Bank of China, financial institutions, and foreign organizations. 

If a foreign company wants to continue doing business in China’s massive market, it will most likely adopt this digital currency and its wholesale payment network.

Author: Chyngyz Sher

Company: Sapience Pro

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