China’s Central Bank Digital Currency Likely to Co-exist with Third Party Payments over the Long Haul
A leading blockchain expert says that there is room for China’s new central bank digital currency (CBDC) to co-exist alongside established third party payments providers over the long-term.
Liang Wei (梁伟), chair of the Blockchain and Digital Economy Joint Laboratory (区块链与数字经济联合实验室) at China Telecom said to Securities Daily that the People’s Bank of China’s digital currency/ electronics payments (DC/EP) system will not necessarily pose a threat to existing payments giants such as Alipay and Tencent.
The advantages of third-party payments platforms such as Alipay and WeChat compared to DC/EP is that they are already extremely mature, and have long been widely accepted by the public.
DC/EP is still at an initial stage, and acceptance on the user end is still unknown. Additionally, Alipay and WeChat provide highly diversified financial products, such as Yu’e Bao and fund products.
Under different usage scenarios, DC/EP and third party payments platforms have their advantages and disadvantages, and users with different needs will likely select different payments platform.
For this reason DC/EP and third party payments will likely continue to co-exist over the long-term in future.
Liang nonetheless expects the CBDC to have a profound impact on China’s monetary policy and payments ecosystem.
In terms of monetary policy, DC/EP’s traceability and control of fund flows will be of benefit to the central bank undertaking structural adjustments. Secondly, DC/EP replaces M0, and will re-constitute the fundamental monetary structure and thus influence the money multiplier.
Additionally, in terms of the payments ecosystem, third party payments organisations and DC/EP are closely associated in three types of operations.
The first is payments operations licensed by the central bank, including online payments, pre-payment card issuance and handling etc. The second is leveraging the traffic advantages of payments platforms to undertake sales of asset management products, and the third is credit assessment and risk control operations that rely upon payments big data, such as Zhima Credit.
DC/EP upgrades the convenience of traditional M0 payments, and for this reason will create a shock to the first category of operations for third-party payments organisations. If the first category, which serves to bring in payments traffic, is affected, then this will have negative impacts on the second and third category of operations for payments platforms.
Liang also sees the two-tier design of China’s CBDC as minimising impacts on the banking system by maintaining continuity in the monetary system.
The two-tier central bank – commercial bank system adopted for the DC/EP minimises the impact on commercial banks.
Commercial banks make a 100% deposit with the central bank. At the time of issuance the central bank places digital currency with the commercial bank, while simultaneously deducting the same amount from the commercial bank’s deposit reserves, before the commercial bank exchanges digital currency with the public.
The central bank is responsible for issuance, and commercial banks cooperate with the central bank to maintain the issuance and circulation system for digital currency.
On the one hand cooperation with other commercial banks and organisations can permit full use of resources and disperses the risk borne by the central bank.
On the other hand, continuation of the current monetary issuance system can avoid creating a squeezing-out effect for commercial deposits, leading to financial disintermediation.
PBOC announced the start of trials and closed testing of the CBDC at cities including Shenzhen, Suzhou, Xiong’an and Chengdu at the end of April, although PBOC governor Yi Gang said that there is still no set schedule for official release.