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China's e-CNY

Updated: Mar 19, 2022

The University of Hong Kong Kerry Holdings Professor Douglas Arner discussed the evolution of e-CNY in a recent panel at Regulation Asia's Crypto Regulation Asia Summit 2022.

The panel, moderated by Irene Liu, Chief Governance and Reporting Officer of UnionDigital Bank, tackled "Risk and Reward: An Outlook for CBDCs, Stablecoins and Settlement Coins."

Panelists include HKUx-edX Introduction to FinTech speaker Charles d'Haussy (Asia Managing Director, ConsenSys), John Ho (Co-head of Financial Markets, Wholesale Banking legal, Standard Chartered Bank), and Rocky Mui (Partner, Clifford Chance).

In this part of the panel discussion, Professor Arner focused on China's pursuit to drive the global development of CBDC, leading to the evolution of the e-CNY.


I think China provides a great example of the points that Charles (d'Haussy), Rocky (Mui) and John (Ho) were making about rationales. I think really the key point we're thinking about CBDCs, is that you start with the circumstances of the individual country, the individual jurisdiction, and then you think about the technology.

And I think it's ironic in some ways you mentioned Satoshi (smallest denomination in Bitcoin), you mentioned Bitcoin, the idea at the very beginning of that idea was a challenge to sovereign based currencies.

And of course, what we have with CBDC in some ways is the classic idea of the Empire Strikes Back - taking that technology and responding to that challenge to try to build, In some cases like China, their exclusive alternative to eliminate any possible competitors.

If we look at Central Banks, Central Banks everywhere in the world have a great deal of engagement with payment systems. The area of technology that Central Banks know better than anyone else is really on the payment side. We've seen Fedwire, Telegraph, Swift, RTGS systems, FPS - CBDCs are an evolution of a long-term process.

If we look at China, they began experimenting the Central Bank, experimenting with Blockchain in 2013 and 2014, looking to see whether this new technology might be usable.

And I think most Central Banks had come to the conclusion - by around 2016 and 2017 - that was interesting, but they weren't going there yet.

In 2019, as Charles mentioned, Facebook's announcement of Libra accelerates the project. And we see in Hong Kong the announcement by the People's Bank of China just a couple of months after of the intention to launch what was then called DCEP, the Digital Currency Electronic Payment system now generally known as the e-CNY.

But why?

One reason of course is a response to the potential threat of a foreign private alternative.

But the second was also a recognition that the emergence of the duopoly of Alipay and Wechat Pay was posing both risks from the standpoint of cyber security and financial stability, but also from the standpoint of potentially constraining development because of their lack of interoperability in the context of payments.

And so one can see this as a means to build an electronic backup - to build a system to ensure interoperability to support greater competition and innovation in the financial system and in the economy more broadly.

One can think of it from the standpoint of building a monetary instrument which can be embedded in blockchain applications instead of other alternatives, and that giving a strategic boost to China's ambitions in the blockchain area.
And of course finally Financial Inclusion.

And yes, we can often talk about the billion people in China that use Alipay or Wechat Pay, the 300 million downloads of the e-CNY app. But that still leaves 200 to 300 million people that don't have access to modern electronic payment systems. And certainly one of the functions was to bring them in.

A second and something that anyone who has been to China in the past five years will recognize, as a foreigner, is the challenge of really doing anything in a big city without access to electronic payments.

And so the Beijing Winter Olympics was meant to be a national rollout where all of the millions of foreign visitors coming in could use it all across the country so that they could better engage with the economy.

Now of course that plan, as a result of COVID, has not happened.

But what we are seeing this year is the national pilot of the system where we'll probably see some evaluation which will then lead to a full roll out.

My guess is next year.

Further Reading:

After Libra, the e-CNY and COVID-19: The New World of Money and Payments by Ross P. Buckley, Douglas W. Arner, Dirk A. Zetzsche, and Anton Didenko | London School of Economics Business Review

Stablecoins: Risks, Potential and Regulation by Douglas Arner (HKU), Raphael Auer (BIS), and Jon Frost (BIS) | SSRN


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