China’s much anticipated Central Bank Digital Currency (CBDC) will start pilot testing this month, according to local outlet Caijing. The first firms involved are the four major state-owned banks, the three big telecoms companies and Huawei, which recently signed a cloud deal with the People’s Bank of China.
According to Fan Yifei, the deputy governor of the People’s Bank of China (PBoC), the currency has completed its top-level design, formulation, functional research and testing. The next step is to launch pilots, which are planned for Shenzhen and Suzhou.
The currency is referred to as the Digital Currency Electronic Payment (DCEP). That’s in part because it is a two-tier currency, where the first part involves the commercial banks converting some of their central bank deposits into digital currency. And the banks then distribute this digital currency to consumers. The process is intended to mirror the way physical cash is distributed.
The four state-owned banks involved are the Industrial and Commercial Bank of China (ICBC), China Construction Bank, Agricultural Bank of China, and Bank of China. And the three telecoms companies are China Telecom, China Mobile, and China Unicom.
The pilot banks were summoned to a meeting in November. Some are cooperating with the telecoms companies, and others are planning independent pilots. In turn, this provides options for storing the currency either on a SIM card or a wallet app. The DCEP is also capable of being used both online and offline because it’s stored on the phone, so could be transferred from phone to phone.
For the tests, the banks get to choose the application areas with popular fields including transport, education, medical care and retail. They can also select their own technology route. This means its conceivable that blockchain may be involved from the commercial bank’s perspectives. Caijing also reports that some of the private banks are cooperating with smaller banks.
Although the dominant digital payments firms Alipay and Tencent’s WeChat / WePay are not yet formally involved in the pilots, the companies have been in touch with the authorities, and it is thought they will participate in tests at some point.
The PBoC deputy governor, Fan Yifei, was talking at the “Eighth China Payment and Clearing Forum”. At the same event, he is quoted by Beijing News as focusing on supervision. Specifically, specialist payment firms created issues for the PBoC because, for some time, there was a lack of transparency or ability for the central bank to supervise, which has since been rectified.
That’s because the payment companies had bank accounts with various commercial banks. Payments by customers would appear as a transaction in the bank account from the payment company, which meant the central bank was unable to determine to which individual the transaction related.
Another issue relates to interoperability. With WeChat and Alipay, users cannot scan each other’s codes across platforms, but the DCEP wallets will be compatible with each other. Other speakers referred to ten different barcode standards being used for payments and the desire to unify them.
There is some debate as to whether or not the DCEP will impact the duopoly position of WeChat and Alipay, which together account for 93% of China’s mobile payments. If the two firms also participate in the DCEP, they still have a massive head start.
In case you missed it, we explored how the DCEP could help the Renminbi to challenge the US Dollar’s role as the world’s reserve currency.