Technology
China's central bank is collaborating with Ant Financial and Tencent to develop digital currency.
According to state media, China's central bank has signed a strategic partnership agreement with Ant Group, Alibaba Group's fintech affiliate, to assist in the creation of a technological framework for its sovereign digital currency.
Since 2014, China has been developing its electronic yuan, or e-CNY, with the aim of replacing some of the country's currency. The digital cash will first be used for retail purchases in China before being used abroad, according to Chinese officials, who did not provide a timeline for its official launch.
According to the state tabloid Global Times, the two sides will work together to facilitate the creation of the e-CNY, which will be built on Ant's database, Ocean Base, and mobile development platform, mPaaS.
The anticipated e-CNY
According to the paper, the bank has been collaborating with Ant and Tencent to co-develop the e-CNY for the past three years, citing details recently disclosed by the country's two largest e-payment providers.
Despite being subjected to the government's extensive anti-monopoly crackdown and investigation, the revelation appears to show that both firms were touting tight relations with the regulator.
According to analysts, the bank will need help from local fintech companies and large retailers to develop the infrastructure, which will include distribution networks for the national virtual currency, which is currently being tested in cities such as Beijing, Shanghai, and Shenzhen.
However, its success may result in it stealing market share from these tech companies, indicating, according to analysts, that China is planning to crack down on monopolies and “nationalize” vast troves of consumer financial data.
Who's in charge?
“The Chinese government is advising Ant to hand over his big data to the central bank. Since the Communist Party is in control, the data will not stay in private hands,” Francis Lun, CEO of Geo Securities Ltd. in Hong Kong, told VOA by phone.
According to the Financial Times, Beijing has asked Ant to hand over its data to a new state-controlled credit scoring firm, which will be operated by former central bank executives and serve other financial institutions, including Ant's lending arms.
According to news reports, Ant insisted on leading the business, arguing that too much government interference would pull the industry down. The regulator, on the other hand, disagreed, claiming that Ant's participation in the new business would generate a conflict of interest.
Ant won't be able to defy the regulator's demand, according to Lun.
The e-Prospects CNY's
He also predicted that the e-CNY will be widely used, given that all Chinese banks would be required to comply with the regulator.
Domestically, Lun claims that the digital yuan would allow the government to track every transaction made by users "like a big brother." Its use outside of China would allow it to circumvent the international settlement mechanism, which is dominated by the US dollar, in what he refers to as a de-dollarization effort.
However, Jerry Lin, director of the Financial Research Institute at the Taiwan Academy of Banking and Finance in Taipei, is skeptical that the e-CNY would be accepted by the private sector since most private companies consider cash flows to be sensitive.
After completing a technological platform, he said, the central bank will work with retailers to broaden the e-distribution, CNY's which is a critical step in determining whether the virtual currency is widely accepted.
According to Lin, the bank sees its new efforts to carry out e-CNY as a win-win strategy for both itself and the country's fintech behemoths.
“By partnering with the central bank [to introduce the e-CNY], these fintech behemoths will be relieved of anti-trust scrutiny from the regulator. “Unless a rival as big as the e-CNY emerges to take up at least one-third of the market shares, their hegemony would be difficult to break up,” Lin told VOA.
Ant and Tencent dominate 54 percent and 40 percent of China's e-payment market, respectively.
Trade-off
In the short to medium term, Lin believes it will be in the fintech firms' best interests to trade some of their shares in China's e-payment market in return for the regulator's lenient treatment of their higher-profit online microlending, personal financial management, and insurance operations.
In the long run, however, China is likely to try to “nationalize” most financial services, including e-payment, credit scores, and financial management, which are currently dominated by private fintech firms, he said.
There is no difference.
Some have interpreted China's rapid digitalization of its yuan as a challenge to the dollar's supremacy as the world's leading reserve currency, but Anne Stevenson-Yang, co-founder and research director of J Capital Research in New York, disagreed.
“I believe there is so much focus on the fact that this is a completely different currency and that they are competing. She explained, "I mean, there's no difference between the DCEP [digital currency electronic payment for e-CNY] and the renminbi."
“Despite several declarations by China about opening capital accounts, the reason why it isn't in international use, the reason why it's in less than 2% of SWIFT payments by value is because China doesn't want to make it available,” she told VOA over the phone, referring to the Society for Worldwide Interbank Financial Telecommunication, the global system for financial messaging and cros.
She also believes that China's expected rollout of the e-CNY is solely for supervisory purposes, not for innovation or to compete with the US dollar.
The general public in China will not see any changes, she claims, because customers will continue to use Ant's Alipay or Tencent's WeChat Pay, with the central bank serving as the engine in the background for both fintech platforms.
