Feb 18, 2021 - 2 minutes read time
This past week, people celebrated the Chinese New Year. Some 50,000 Beijing residents received digital pocket money from the government. Each one got 200 yuan ($31) in a virtual “red packet” that they could use for online and offline shopping.
The total handout of $1.5 million is latest digital currency pilot in Beijing. Unlike any cryptocurrencies, the “digital yuan” is a form of China’s fiat money. It is pegged 1:1 with the existing yuan. It’s also backed by the central bank.
Will it take off? So far, China has been the quickest adopter of digital payment systems.
But the “digital yuan” also has a new, distinct feature. Almost all mobile payment requires a third-party payment platform, like Alipay, PayPal, or Square. The “digital yuan” doesn’t. You can withdraw e-yuan via an ATM machine and load the money on your smartphone. You then pay for items by holding your phone to a point-of-sale device. The device uses near-field communication (NFC) technology. That’s how people can pay without the internet. You don’t even need to link the e-yuan with an existing banking account.
This is a huge advantage in mobile payment. Now, people from remote rural areas without steady internet can use it too. I’ve joined the BBC here to discuss the implications of this setup.
Consider the many developing economies outside of China. They also have large populations of people without access to banks. When they deploy a similar approach to digital currencies, their “unbanked” populations will then be able to participate in the mainstream economy. It will bypass the need for expensive banking products and infrastructure.
But what about blockchain and other cryptocurrencies?
Beijing seems to have given up on them. When we look at the daily transactions worldwide, Bitcoin barely registers in the big picture.
Meanwhile, China is working to internationalize the digital yuan. It signed a joint venture last month with Swift, the Belgium-based global system for cross-border payments. If China can roll the digital yuan out fast enough, it might challenge the dominance of the US dollar in international trade settlement. But even Chinese bankers caution against too much optimism. A director at a large state-owned bank says, “progress towards this will only be gradual.”
P.S., Digital payment has accelerated during the pandemic. What’s your view on cryptocurrencies? Tesla is accepting Bitcoin as a form of payment and investing in it. But the energy needed to mine Bitcoin seems unsustainable. It is reportedly consuming more electricity than Argentina. What standard of digital payment is likely to win the day?
This article is co-authored with Jialu Shan, a research fellow at the Global Center for Digital Business Transformation, an IMD-Cisco initiative.
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