All eyes were on China’s central bank digital currency, e-CNY, during the Beijing Winter Olympics. The e-CNY pilot operated in ten regions of China before being introduced at the Beijing and Zhangjiakou Olympics venues in February 2022. As reported in the Atlantic Council Geo-Economic Center tracker, China leads the adoption and testing of CBDCs, and the Olympics provided a center for the international stage to test the capabilities of e-CNY. The GeoEconomics Center recently hosted Mu Changchun, Managing Director of the Digital Currency Initiative at the People’s Bank of China, and had the opportunity to learn about the latest developments of e-CNY.
What have we learned?
What do they want to achieve?
The use of e-CNY during the Olympics served two important political motivations for the People’s Bank of China (PBoC). First, it was able to test the scalability and throughput of e-CNY transactions. The current transaction rate per second (TPS) is 10,000, but the transaction capacity in the future will reach 300,000 TPS. To contextualize this, contrast it with Project Hamilton, the Boston Fed and MIT led initiative for the digital dollar. The Hamilton project can handle between 170,000 and 1.7 million transactions per second. Moreover, existing forms of payment in China, such as AliPay and TenPay, already process larger volumes of high-speed transactions. At its peak, AliPay’s system was able to complete 544,000 transactions per second during the 2019 Singles’ Day trading event. While the e-CNY system completes transactions at a higher speed than Visa (which is 1,700 GST), it is still miles behind payment giants like AliPay and TenPay in scalability and speed.
A related goal of the PBoC was to create greater resilience in China’s payments ecosystem in the event of disruption in its domestic markets, which are dominated by AliPay and TenPay. Introducing an alternative to the two payment giants would induce greater competition in the market and provide an alternative in case payment systems are shut down due to cyberattacks or network issues. AliPay and TenPay (including its QQ and WePay payment apps), each have more than 900 million monthly active users in China. e-CNY was the only alternative to Visa at Olympic venues, which was the official sponsor of the Games. e-CNY, however, functions as legal tender just like cash, and its adoption is key to creating more competition in China’s payments market.
How many people use it?
The PBoC has not released official figures on e-CNY adoption and usage since October 2021. However, earlier this year, some Central Bank officials said there were 261 million wallets, with total transaction values exceeding RMB 87 billion (~$13.75 billion). Based on the more comprehensive figures from October 2021, 123 million individual wallets and 9.2 million corporate wallets were opened with a transaction volume of 142 million and a transaction value of RMB 56 billion (~ $8.8 billion). This means that the average balances are 3 RMB (~$0.47) for individual wallets and 31 RMB ($4.90) for corporate wallets. The relatively high number of wallets suggests that many wallets have been opened, but are not used for transactions or to hold e-CNY balances.
The number of adoptions doubles between October 2021 and January 2022, which is an interesting phenomenon. This could be due to more publicity and coverage during the Olympics. But it remains to be seen how many e-CNY users are active. At an Atlantic Council event on Feb. 14, 2022, Mu Changchun, managing director of the Digital Currency Initiative at the PBoC, said there have been “a few million renminbi” in transactions each year. day during the Olympics. We expect final figures from the PBoC shortly.
How does it actually work?
e-CNY users can choose between individual or corporate wallets, which offer different transaction limits. Wallets can also be software-based – the e-CNY mobile app, which allows users to manage their e-CNY transactions – or hardware-based, an electronic card that enables touch-based transactions. In his speech to the Atlantic Council, Mu Changchun mentioned that overseas users mainly use hardware wallets at Olympic Games venues. He also featured a video showing how hardware wallets work, including their offline functionality.
Users can download the standalone e-CNY wallet app from their app stores, or they can use the AliPay and TenPay apps as an interface for managing their e-CNY transactions. There are eight other authorized arbiters of the e-CNY application, including the Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications, Postal Savings Bank of China and Bank of merchants from China.
How did they build it?
In terms of technology choices, China uses a centralized ledger to record retail transactions and, in parallel, implements a tributary ledger for the end-of-day reconciliation period. This indicates that China is exploring the use of blockchain technology in its digital currency. The PBoC, like many other central banks, wishes to remain technology agnostic for the time being. However, its choice of hybrid technology suggests that it would be willing to move to a licensed distributed ledger technology (DLT) in the long term.
But what about privacy issues?
There is a trade-off between the anonymity requirements of digital wallets and balance and transaction limits. Wallets with lower balance and transaction limits can retain their anonymity, but transaction limit upgrades require higher identification and know your client standards (KYC). For example, to get a wallet with a balance limit of 10,000 e-CNY, transaction limits of 2,000 e-CNY per transaction and 5,000 e-CNY per day, customers only need to provide a registered phone number. However, upgrading to a higher balance, as well as daily and individual transaction limits, requires ID and banking information. Can linking wallets to phone numbers provide adequate privacy for individual users? China seems to think so. Mu Changchun cited China’s new personal data protection law, which would help preserve the anonymity of such financial data.
Can balance caps and transaction limits be enough for China to crack down on money laundering and illicit activities? China has experimented with anonymity and KYC compromises. However, China will also use AI and big data technology in its matrices to crack down on suspicious and illicit activities. They believe that the integration of e-CNY with advanced technologies, as well as caps on balances and limits, will limit money laundering incidents.
Central banks are primarily concerned with threats to their monetary sovereignty. Their ability to conduct monetary policy could be blunted with the introduction of private digital currencies such as cryptocurrencies and stablecoins. Holdings in e-CNY bear no interest, which limits its competitiveness with holdings in renminbi. The PBoC also offers a deposit insurance scheme for deposits below 500,000 RMB (~$79,000), which would prevent a drastic shift to e-CNY. Moreover, in case of financial difficulties, the PBoC is also ready to charge a small fee for frequent withdrawals from the e-CNY system.
Remember: we are just getting started, although millions of people are already using e-CNY. The e-CNY represents a relatively small share of the money supply in China, as it represents less than 0.0055% of M0 and 0.0002% of M2.
How will China use it internationally?
China has plans for cross-border wholesale testing underway in addition to domestic use. It is working with the Bank for International Settlements on its mBridge project, as well as with Hong Kong, Thailand and the United Arab Emirates to develop an interoperable wholesale CBDC prototype. China is also working on the interoperability of e-CNY with Hong Kong’s faster payment system, in preparation for the launch of e-CNY in Hong Kong. PBoC officials said they will follow the “do no harm” principle in cross-border testing and ensure that any compliance concerns are met.
The Chinese e-CNY is the largest and most public proving ground for the effectiveness of a CBDC. The e-CNY system interacts with commercial banks, payment providers, AI and big data providers, other central banks and international institutions. The pilot is further ahead of many other advanced countries, which are still only researching the development of CBDCs. China’s interest in cross-border e-CNY functionality and its relatively advanced stage of development positions it well to set standards in CBDC developments globally. This is the role that China is eager to play according to our conversations with Mu Changchun. There’s no word yet on a full-scale e-CNY launch, but watch this space for more.
Ananya Kumar is Deputy Director of Digital Currencies at the GeoEconomics Center.
At the intersection of economics, finance and foreign policy, the GeoEconomics Center is a translation center whose goal is to help shape a better global economic future.