Chinese news outlets have reported that the digital yuan app no longer carries the ‘pilot’ label. It dismissed the reason as an administrative one, saying the pilot mode persists. However, even if the digital renminbi is still in pilot mode, we believe this may indicate the central bank digital currency (CBDC) might be nearing the end of its pilot phase and starting preparation for production.
The reason for dropping the ‘Pilot’ description relates to rules requiring Chinese apps to register with the local provincial communications department. The registration name has to be consistent with the name the app, in the App Store and on the face of the phone. However, we’d observe that it would be feasible to append ‘Pilot’ in all these places if the plan was to continue the Pilot for a year or so. Bear in mind that the Pilot commenced in 2020, so it is currently in its fifth year.
The decision to drop the ‘Pilot’ term everywhere may indicate that the period is drawing to a close. The central bank may want to launch the CBDC for several reasons.
So far the demand for the CBDC hasn’t been massive, but that was predictable. Part of that is because China is already very well served for mobile payments through WeChat Pay and Alipay. Some users recently signaled another reason for the limited usage as the lack of places to use it. This creates a negative network effect. The more pilots where users struggle to use the CBDC, the more people conclude it’s too hard to use.
Once the CBDC transitions from its pilot phase to production, it will gain legal tender status. With many outlets accepting it as payment, it will create a virtuous network effect.
mBridge CBDC links to the digital yuan
Another motivation for the launch is that other projects depend on the CBDC. The eCNY is relevant for mBridge, which uses multiple CBDCs for cross border payments. This groundbreaking initiative involves the BIS and the central banks of China, Hong Kong, Thailand and the UAE. It’s not entirely clear when it will launch, but there was talk of a minimum viable project in the first half of this year.
While the other mBridge participants simply connect to their current payment systems, China plans for mBridge to link to the digital yuan system. Having one pilot mode system dependent on another pilot initiative creates too much scope for potential changes. Hence, that’s a driver for transitioning the digital yuan into production.
From the Chinese side, there might be greater demand for mBridge if the digital yuan system is in production. Additionally, the BIS is being prudent and wants to take things carefully. It’s hard for China or Hong Kong to argue to move faster with mBridge when the digital yuan CBDC is still in pilot mode after more than four years.
Meanwhile, given the amount of work that China has put into the CBDC, as a matter of national pride it’s keen to get some firsts. So far the in-production CBDCs have been from smaller Caribbean economies and Nigeria, which is not so small but has had minimal traction with its CBDC. India started its digital rupee work from far behind but is rapidly catching up, although it too is looking to garner more public enthusiasm. Perhaps China wants to make sure it launches before India.
BRICS Bridge
Finally India, China and mBridge participant UAE have something in common. They are all members of the BRICS trade group, which has vowed to use more local currency payments. BRICS is reportedly working on its ‘BRICS Bridge‘ project, which sounds similar to mBridge. BRICS Bridge will likely link to the digital yuan, creating another motivation to go into production.
So, while the digital yuan will probably still be in pilot mode for a short while, our guess is it won’t be this time next year.
