Today Fan Yifei, deputy governor of the People’s Bank of China (PBC), wrote at length about China’s digital yuan in China’s Financial News.
While much of the content about the central bank digital currency (CBDC) has already been disclosed, there were a few new revelations.
Wallets only opened by some banks
It was previously thought that the role of the big four state banks was primarily in testing. But the deputy governor clarified things a little. He explained that given the digital yuan or renminbi (RMB) is cash or M0, current laws only allow commercial banks to provide the public with digital yuan exchange services. The implication is that Alipay and Tencent’s WeChat Pay cannot provide these services. However, that doesn’t mean that digital RMB bought from a bank can’t be held in the wallet.
But Fan Yifei went a step further: “In order to ensure the security and stability of the digital renminbi system, it is necessary to carefully select a commercial bank with strong capital and technology as the designated operating institution to take the lead in providing digital renminbi exchange services.” He went on to explain that because the digital yuan has more technical requirements, only some commercial banks will be designated as operating institutions. Other commercial banks and related institutions have to work through the designated banks.
These designated banks are responsible for opening wallets for clients. The type of wallet that can be opened is based on the strength of customer information and identification that the bank has. This explains the four types of wallets and the different financial limits revealed with the most recent screenshots a couple of weeks ago. And the PBC also provides a quota.
So where does that leave the rest of the banks and payment firms? “Other commercial banks and related institutions, undertake the circulation services of digital renminbi under the supervision of the People’s Bank of China and are responsible for the management of retail links, so as to realize the safe and efficient operation of digital renminbi, including payment product design innovation and scenario expansion.”
Does fee-free money create competition for Alipay and WeChat Pay?
The other point we gleaned from the article was the emphasis on a digital yuan being like cash. And particularly that it doesn’t cost anything to use cash. Fan Yifei explained the central bank “does not charge exchange and circulation service fees from the issuer, and commercial banks do not charge individual customers for digital renminbi exchange and redemption service fees.”
If you think about it, that’s quite different from physical cash. Certainly in the West, charges for retailers that deposit cash can be significant, sometimes as much as 1%. That’s because the commercial banks incur real costs, which is not the case for the digital RMB.
Plus, the digital yuan is legal tender, so retailers have to accept it.
If you extend that line of thought, when you pay a retailer in cash, they don’t incur any cost in accepting cash from you. However, if a retailer accepts money using Alipay or WeChat Pay they pay merchant fees.
This could be how the digital yuan competes. Retailers that don’t mind the extensive tracking they expect from the government may offer discounts for using the digital yuan rather than Alipay or WeChat Pay. That’s before any other incentives that the PBC might offer at launch.