China is a decade ahead of territories such as the US and the Eurozone when it comes to developing a central bank digital currency (CBDC), according to Shanghai-based author and fintech consultant Richard Turrin.
The People’s Bank of China (PBoC) is at an advanced stage of developing its digital yuan, officially known as the e-CNY, and progress is analysed closely given the country’s size and international significance. It is currently in the throes of expanding CBDC trials undertaken in 12 cities ahead of the 2022 Winter Olympics, although a date has yet to be announced for full issuance.
“They are providing a roadmap for everyone else to follow – if we don’t get crushed by political issues with China and if we remain open to some of the technological innovations coming out of China that are really spectacular,” Turrin told the online audience during a webinar, ‘Digital Currencies in Asia: Lessons for Europe’, which was co-organised by the Frankfurt-based Digital Euro Association and the German Institute for Japanese Studies (DIJ).
“I’m not saying that all CBDCs are going to be copies of China’s,” Turrin, who authored the book ‘Cashless: China’s Digital Currency Revolution’, said. Yet, he said, many other countries would be looking to the “top-level decisions” that China has made on several questions since starting research in 2014, such as: “Do you make it single-tier or two-tier? Do you have interest rates on your coins?”.
In January, the US Federal Reserve released an eagerly-anticipated paper into the pros and cons of a potential digital dollar. The 40-page document asks for public comment on more than 20 questions about a US CBDC. “China answered these questions seven or eight years ago,” Turrin said. “This is not new. You should be reading the Chinese research. The systems are more similar than you’d imagine.”
Privacy as the CBDC battleground
Hiromi Yamaoka, former head of the Bank of Japan’s (BoJ) payment and settlement systems department, was among the other panellists at the webinar – which was held on 24 March – and said that Asia “also has a lot to learn from Europe.”
He said that while Europe had a “firm stance” on data protection and privacy in form of the General Data Protection Regulation (GDPR), China has stated that one of the CBDC’s purposes is to prevent tax evasion. “This means that authorities would be able to obtain information or data if necessary,” Yamaoka explained. “It will be interesting to see how the differences in terms of the policies on data and privacy could affect the development of CBDCs.”
“The battle for CBDC in the EU [European Union] and in the US is one of privacy,” Turrin said, adding: “The fear is that the government will control and understand all of your payments.”
With China’s CBDC, the government ultimately controls both the processing technology as well as account-holder data but needs a court-ordered warrant should officials want to ‘put both parts together’. The country has recently introduced data policy laws that are “far more rigorous” than the EU’s GDPR, Turrin said. “What these data laws say is that the Chinese government cannot go to a cell-phone provider and simply figure out who you are. They need a warrant in order to find out who a phone number belongs to,” he said.
Turrin said that in the US and Eurozone, where the European Central Bank recently launched a tender process for design and business model consultancy for a potential digital euro, data separation will be needed: “It will need to be banks or third-party organisations that hold on to the naming data. That’s going to be the key to maintaining privacy and the government being able to say: ‘We don’t know who you are because we don’t have the data’.”
Turrin asserted that CBDCs are – ultimately – highly protective of users’ data, saying that “your data is better protected by the government than it is by a private corporation that has every incentive to monetise your payment data.”
‘Critical to financial inclusion’
In the concluding part of the webinar, Turrin addressed media reports about digital yuan usage numbers to date being relatively low: “It’s still in trial. Don’t think that because the reported numbers for e-CNY use are low, that it’s a failure.”
The digital yuan app is currently geo-locked and only downloadable in the trial localities. Nevertheless, it has so far been downloaded about a quarter of a billion times, he said.
On the topic of financial inclusion, Turrin highlighted China’s trial of ‘smart cards’ equipped with an LCD window that displays remaining funds in the linked digital wallet. These enable offline transfers in areas without a mobile-phone signal. And for those unable to afford a smartphone, they offer the possibility to use the digital yuan. “These are absolutely critical to financial inclusion in the rural villages,” Turrin said.
In countries such as Thailand, Indonesia or Malaysia, people tend to rush to adopt digital innovations hoping that these hold “the key to a better life”, he said. “Digital products are seen as aspirational by poorer populations because they give them access to products and services that they never had before. It is a uniquely South-east Asian sort of mentality.”
Further speakers in the discussion, which was moderated by Digital Euro Association chairman Jonas Gross, were Masaki Bessho, head of the FinTech Centre in the BoJ’s payment and settlement systems department; and Oriol Caudevilla, co-leader of the financial inclusion and CBDC working groups at the Global Impact FinTech (GIFT) Forum. The webinar was opened by Markus Heckel, senior research fellow at the DIJ, which is part of the Max Weber Foundation (which is funded by Germany’s Federal Ministry of Education and Research).
‘Digital yuan accounts hit 140 million: PBoC official’ – our news story (9 November 2021) on China’s latest CBDC digital wallet download numbers
‘Digital yuan “technically ready” for international use as project “prudently advances”’ – our news story (21 July 2021) on the PBoC issuing an official update on its CBDC progress
‘Digital yuan is “back-up” to private payment platforms, says PBoC’ – our news story (26 March 2021) on the PBoC’s Mu Changchun saying that China’s CBDC was needed as a ‘back-up’ for the country’s retail payments system and would co-exist with private payments platforms