On Saturday, it was announced that Chinese ecommerce giant Alibaba had an 18.2 billion yuan ($2.8 billion) antitrust fine imposed on it by the State Administration for Market Regulation following an investigation started in December. The record breaking fine was calculated as 4% of its 2019 domestic sales and resulted from Alibaba allegedly requiring merchants on its platform not to participate with its competitors. Today it was announced that Alibaba offshoot Ant Group, known for its dominant Alipay mobile payment app, was told to cease monopolistic practices and become a financial holding company.
There are two potential blockchain and digital currency angles. One relates to the digital yuan, which is currently in late-stage testing and the other is Ant’s blockchain activities. But first, it’s worth exploring how serious the latest salvos are.
Regulatory scrutiny started early last year
For Ant, this is the latest warning shot after its massive IPO was pulled in November last year. We noted months before the scheduled IPO that the government was unhappy, was investigating loan delinquency rates and considering antitrust action.
But forcing the company to alter some business practices and become a financial holding company – with the significant capital requirements that entails – is far from being the regulators’ final actions. Not only could they impose fines on Ant, but the government has drafted regulations that would enable them to force not just Ant to be split up but also Alipay.
A month ago, Ant Group’s CEO Simon Hu resigned citing personal reasons, and his role was taken over by Chairman Eric Jing. Alibaba founder Jack Ma controls the company.
Last December following scrutiny, Ant at one point stopped taking fixed deposits from clients. And it took steps to reduce loan quotas on Huabei, the buy-now-pay-later platform. Last month, the regulators told all microfinance companies, including Huabei and platforms run by Baidu, JD and Meituan, to stop lending to college students.
As part of its IPO preparations, Ant Group shared its results for June 2020. It showed payments making up a significant but declining portion of revenues as credit, insurance and wealth management grew rapidly. Notably, Ant bears very little of the credit risks, passing on 98% to banks or securitizing them. And credit risk is one of the concerns of the regulators.
Today’s regulatory announcement
Today the People’s Bank of China issued a statement about the Ant meeting held together with the China Banking Regulatory Commission, the China Securities Regulatory Commission, the Foreign Exchange Bureau.
It outlined five areas where it wants to see changes:
- It requested more payment options and the regulators aren’t happy with buy-now-pay-later credit offered at the point of payment within Alipay.
- Ant’s internal credit scoring was described as an ‘information monopoly’ and it says personal information must be used legally, minimally and only out of necessity.
- Ant Group has applied to become a financial holding company, equivalent to a bank.
- The regulators said Ant needs to rectify “illegal credit, insurance, and wealth management” and be more attuned to high leverage and the risks of contagion.
- It wants to see the balances held in Ant’s Yu’e Bao money market funds reduced.
An interesting aspect of the statement was an emphasis on the international aspects. The regulators highlighted the recent U.S. bigtech antitrust steps. But it noted the cooperation of international financial organizations to formulate fintech standards. The central bank is participating in a Bank for International Settlements Innovation Hub.
While many view China’s increasing economic strength as threatening, when Facebook unveiled Libra (now Diem), China perhaps viewed this a more threatening than most other economies.
A digital currency, blockchain impact?
China has progressed onto the second stage of far broader central bank digital currency (CBDC) trials. One of its stated motivations for the digital yuan is to provide redundancy in case of failure of the two dominant retail mobile payment apps, Alipay and WeChat Pay. Clearly, it’s not entirely comfortable with private organizations dominating payments.
Both apps have been active in digital yuan trials and will offer the digital currency within their solutions. Conceivably, these antitrust actions might encourage Alipay not to bury the CBDC option too deeply. ‘More payment options’ was one of the points requested by regulators today.
At a strategic level, if a company with an international brand faces domestic headwinds, there’s always the option to focus overseas, a direction Ant has been moving towards for years. Jack Ma has openly spoken about the potential for payments in Africa and has acquired overseas payments firms elsewhere, although the U.S. government blocked the acquisition of MoneyGram in 2018.
Turning to blockchain, a widely regarded fintech from a country perceived as advanced in blockchain adoption, might get welcomed enthusiastically.
One of the blockchain solutions launched by Ant is Trusple, targeted at international trade. It had no problem attracting big name banks such as BNP Paribas, Citi, DBS Bank, Deutsche Bank, and Standard Chartered.
Ant has taken a different path compared to most by making its blockchain protocol proprietary. The vast majority of high profile blockchain protocols are open source – think Hyperledger Fabric, Corda and Ethereum. In China there’s the FISCO BCOS blockchain, backed by Ant competitors Tencent and JD amongst others. It is also open source, as is Baidu’s Xuperchain. Whether or not this matters remains to be seen, but a proprietary blockchain that services an entire sector enables greater scope for both monopolistic practices and aggressive use of data.