News Apr 26

China's central bank and Ant team up to develop digital yuan platform

Ant and PBoC have formally agreed to promote construction of a digital yuan technology platform; And the big six state banks are pushing the e-CNY – to provide consumers with a payment alternative to Alipay and WeChat Pay

China central bank and Ant team up to build digital yuan platform
A sign indicating digital yuan, also referred to as e-CNY, is pictured on a vending machine at a subway station in Shanghai, China on April 21, 2021. Photo by Aly Song/ Reuters.

(ATF) Ant Group and China's central bank have formally agreed to promote the construction of a digital yuan technology platform.

The Central Bank Digital Currency Research Institute and Ant signed a technical strategic cooperation agreement on Sunday April 25. The digital yuan technology platform will be based on OceanBase, a database independently developed by Ant Group and the mobile development platform mPaaS.

China Business News reported that under the agreement the two parties will rely on their respective technological advantages to carry out in-depth exchange and cooperation on the digital yuan, to promote the implementation of new technologies in a digital upgrade, and serve the real economy.

Recently, the promotion of digital yuan pilot projects has attracted much attention. 

On April 12, Li Bin, director of the central bank’s Macro-Prudential Management Bureau, revealed that the scope of digital yuan pilots has been expanded in an orderly manner. Li Bin said application scenarios had been gradually enriched, while application models had continued to innovate, and operation of the overall system had been stable. He said the format had business feasibility and reliability.

The digital yuan has been expanded to 10 cities, including Shanghai, Hainan, Changsha, Xi'an, other pilot cities and the Beijing Winter Olympics venue. Li Bin said that during the pilot process, all parties had a relatively high interest in the digital yuan, and users in the pilot areas were enthusiastic. The pilot scenarios now cover many areas such as living payments, catering services, transportation, shopping and consumption, plus government services.

The construction of technical infrastructure is regarded by the industry as an important part of promotion of the digital yuan because digital currency circulation services need to build a convenient, stable and efficient infrastructure.

Li Bo, deputy governor of the central bank, spoke at the Boao Forum for Asia 2021 annual meeting recently, saying there is no specific timetable for an official launch of the digital yuan. Pilot work will be continued and the scope of these efforts will be expanded, before any national promotion. In the meantime, officials will improve the security and reliability of the system, and formulate corresponding legal and regulatory systems.

It is understood that OceanBase is the world's first distributed relational database applied to core financial business and that it was independently developed by Ant Group. It can achieve strong data consistency, high availability and efficiency in high-concurrency and high-traffic scenarios. Its unique LDC architecture design can also provide unitised deployment capabilities, and achieve multiple applications and city-level disaster tolerance through unlimited expansion of the architecture.

In addition, mPaaS is derived from Alipay's mobile development platform, which can provide a cloud-to-end one-stop solution based on mobile development, testing, operation, and operation and maintenance. 

In recent years, Ant has actively participated in digital yuan research and development experiments, and in accordance with arrangements with the People’s Bank of China, is preparing to conduct closed pilot tests in Shenzhen, Suzhou, Xiongan, Chengdu and future Winter Olympic sites.

State banks promoting digital yuan

Meanwhile, in China's commercial hub Shanghai, six big state banks are quietly promoting digital yuan ahead of a May 5 shopping festival, carrying out a political mandate to provide consumers with a payment alternative to Alipay and WeChat Pay.

The banks are persuading merchant and retail clients to download digital wallets so that transactions during the pilot programme can be made directly in digital yuan, bypassing the ubiquitous payment plumbing laid by tech giants Ant Group, an affiliate of Alibaba and Tencent.

"People will realise that digital yuan payment is so convenient that I don't have to rely on Alipay or WeChat Pay anymore," a bank official involved in the rollout of the digital yuan – or e-CNY – for the Shanghai trial, under the guidance of China's central bank, was quoted as saying by Reuters (the official was not authorised to speak with media and declined to be identified).

China's development of a sovereign digital currency, which is far ahead of similar initiatives in other major economies, looks increasingly poised to erode the dominance of Ant Group's Alipay and Tencent's WeChat Pay in online payments, as ATF predicted many months ago.

That turf encroachment coincides with Beijing's expanding effort to clamp down on anti-competitive behaviour in the internet sector, part of a wider reining in of the clout of sector heavyweights.

Regulators scuppered Ant's record $37-billion IPO in November and earlier this month imposed a sweeping restructuring on the fintech conglomerate controlled by Jack Ma. Ma's Alibaba Group Holdings was recently hit with a record $2.8-billion antitrust penalty.

In public, the People's Bank of China (PBOC) says the digital yuan won't compete with AliPay or WeChat Pay, and serves only as a "backup" or "redundancy". But in private, state banks marketing the digital fiat currency for the central bank bluntly describe Beijing's intention to undercut the duo's dominance.

"Big data is wealth. Whoever owns data thrives," said another banking official tasked with promoting the digital yuan.

"WeChat Pay and Alipay own an ocean of data," so the e-CNY rollout facilitates China's anti-trust campaign and helps the government control big data, he added. The PBOC and Tencent declined to respond to requests for comment.

Ant declined to comment on the relationship between Alipay and e-CNY. Ant-backed MYbank said it is "one of the parties participating in the research and development" of the digital yuan, and "will steadily advance the trial pursuant to the overall arrangement of the People's Bank of China."

DIGITAL CASH

The e-CNY digitalises a portion of China's physical notes and coins, or currency in circulation (M0), and was launched last year in small pilot schemes in four cities.

Under a two-tier distribution system, the PBOC issues the digital currency to banks, which pass the money to individuals and companies.

The six banks in the digital yuan pilot schemes include China's biggest lenders such Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and China Construction Bank.

"The e-CNY's ease of use will likely be comparable to Alipay and WeChat Pay, while its security function will likely be higher, and as sophisticated as Bitcoin," HSBC wrote in a recent report, adding that it expects the digital currency to "proliferate" within China.

Among a slew of likely motivations cited by HSBC behind the push is the central bank's desire to gain control of payment channels and consumption data from Alipay and WeChat Pay.

CONSPICUOUSLY ABSENT

Digital wallets, which are still being beta tested, can be bundled with a dozen popular apps including Meituan, JD.com, Didi and Bilibili, but conspicuously cannot be linked to WeChat or Alipay. That means none of the participating banks can transfer digital yuan between their digital wallets and the two established payment platforms.

"PBOC doesn't want to see the money being routed through third-party payment systems," a banker said, citing the need for "information segregation".

The digital yuan will digitise "the last mile" of consumption, enabling banks and merchants to capture data and gain insights into spending patterns, said Wilson Chow, Global TMT Leader at PwC China.

That data is now dominated by Alipay and WeChat Pay, which control a combined 94% of China's online payment market.

But mass adoption of the e-CNY won't happen overnight.

Chow predicts that e-CNY will account for roughly 10% of China's electronic payments market in a few years, co-existing with Alipay and WeChat Pay.

To entice users, bankers said the PBOC will likely give "red envelopes" of free digital cash or discounts to Shanghai citizens around the upcoming shopping festival, an event aimed at promoting spending to fuel economic recovery from Covid-19.

PBOC deputy governor Li Bo told the Boao forum last week that domestic adoption will precede cross-border payments with digital yuan, which many analysts believe will bolster the yuan's global status as China seeks ultimately to break the dominance of the dollar settlement system.

"The priority of the yuan's digitalisation is currently to promote its domestic use," Li said.

with reporting by Reuters

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