China is leading the digital currency race amongst central banks but there are considerable hurdles to overcome in order to achieve critical success. finews.asia takes a look at some of the top challenges the electronic yuan faces.
Major central banks worldwide are all making various efforts to explore the opportunities – and risks – of a central bank digital currency (CBDC). Bank of Japan was the latest to join the Fed and the ECB to kickoff experimentations for actual usage with early phase trials aimed to start early next year.
In a bid to achieve a first-mover advantage, China’s digital yuan has taken a considerable lead towards a full launch with public trials recently completed in Shenzhen. But by the same token, there are undoubtedly risks involved in pioneering groundbreaking developments of such scale.
What are the top hurdles the digital yuan faces?
1. Incumbent Competition
Although China may be a first-mover amongst central banks in the digital payment market, it certainly is not the first overall and one of the major domestic challenges will be competing with established platforms like WeChat Pay and Alipay.
Reported user reviews from the Shenzhen trials are consistently observing very strong similarities between the digital yuan and the tech duo’s payment platforms with most seeking more convenience, security and features before considering a shift.
And given the deep embedment of WeChat Pay and Alipay in Chinese daily life, stickiness to the platforms is likely to be very high and the digital yuan will have to quickly achieve both scale and innovation to overcome such competitor strengths.
2. Shadow Banking Risk
Unlike some of its other central banking peers, the People’s Bank of China (PBoC) is looking to fully replace both long-term bank deposits and cash in circulation. This undoubtedly enables monitoring of money flows and risk management on a much larger scale.
But also unlike some other economies, China has historically been dependent on the informal financial system – better known as «shadow banking» – and the adoption of the digital yuan infrastructure will likely further clamp down on such activities. Although regulators are pressuring a cleanup of shadow banking assets on balance sheets, industry leaders have already signaled pushback with a top think tank calling for a deadline extension from 2020 to 2022 before the PBoC revised the deadline to 2021-end in August this year.
If balance sheets are not sufficiently strong to comply, the deadline could potentially face more extensions which would impact the digital yuan’s timeline. But if the digital yuan launches before shadow banking risk is sufficiently contained, Beijing could ultimately trigger potential liquidity risks.
3. Subsidization Risk
There are numerous ways in which China is building momentum for a digital yuan launch by cost absorption or subsidization including fee-free payments for vendors and the 10 million yuan ($1.5 million) giveaway during the recent trials. Although this can undoubtedly lure new users – 1.9 million individuals applied for the 50,000 «red packets» gifted in the Shenzhen trial – it can also be costly.
«I’m not planning on using it again,» said an anonymous user reportedly surnamed Yuan who works in finance. «Unless there is another red envelope, of course.»
Direct financial costs and subsidies aside, there is also the question of the impact on the broader payment market. Given that the digital yuan is a state-backed project, how will private payment platforms like WeChat Pay and Alipay respond as competitors? Will they evolve and survive against the state or could accidental self-cannibalization occur?
4. Crypto Risk
- Page 1 of 2
- Next >>
