By Pratham Rawat ’24
By: Staff
China had high expectations for the performance of its central bank digital currency (CBDC), the e-CNY. Usage of online payments systems like WeChat Pay and Alipay is ubiquitous among the population, and so the Chinese government expected the digital currency to take off quickly. However, more than two years after the release of the original pilot program, transaction rates are disappointing. The currency, accessible only in a number of pilot cities, has processed only 260 billion USD of value since its inception. In comparison, Alipay, the largest payments processor in China, processes 17 trillion USD each year.
China’s big push for e-CNY
China’s e-CNY low usage rate is not just a Western invention; even former Chinese central bankers have commented on the poor performance of the currency, outwardly stating their disappointment. Meanwhile, the Chinese government still remains committed to their CBDC vision. Cities have committed to paying municipal employees in e-CNY and will also accept the currency for taxes and charges. The 2022 Beijing Olympics had a very public trial of e-CNY, which was made available for foreigners to easily make transactions. For domestic users, the government has hosted large lotteries and giveaways to incentivize people to use e-CNY.
Government incentives can only push the e-CNY so far. However, both WeChat and Alipay have added support for connecting e-CNY wallets, enabling it to be used with the massive pre-existing ecosystem of online payments. Banks have announced that they have processed loans in e-CNY and commodities trades have been settled in the digital currency on cross-border exchanges. In addition, a number of new use-cases for the currency are being tested and launched for both retail and wholesale users, promising much faster overseas transfers than using traditional banking systems.
Despite all of these efforts, the e-CNY project has not caught on. This ultimately stems from a mismatch between the reality of e-CNY and the expectations of the Chinese government. A 2021 white paper by a working group at the People’s Bank of China states that “e-CNY is mainly a substitute for cash in circulation.” To supplement this, the currency supports offline transactions through specialized hardware. This is aimed at increasing inclusion in the financial system. However, such a system will never be used as extensively as existing Chinese payment giants. Currently, WeChat and AliPay offer a far wider set of features for users. Even though features are slowly being added to e-CNY, there is no real reason for users to make it their main platform of choice.
What does a CBDC really mean for the people who use it?
Ultimately, viewing e-CNY as a competitor to Alipay and WeChat Pay is misguided. The fundamental benefit that users can derive from e-CNY, or any CBDC, stems from the instant settlement of transactions. The technologies that underpin digital currencies have the potential to greatly simplify the numerous systems currently in place to mitigate the counterparty risk that stems from delayed settlement times. However, the common Chinese citizen is probably not concerned with settlement times. Until the real benefits of these technologies can be made apparent to end users, with meaningful improvements that outweigh the costs of switching to a new platform, usage will continue to be low.
The problem is, many of these improvements may not materialize for a number of years. In the meantime, Chinese citizens will continue to use their traditional online payment platforms. To drive adoption meaningfully, these platforms should be updated to use the e-CNY settlement system. When a user is sending money through Alipay, their funds should be routed through the e-CNY network directly to the receiver’s account. Whether the transaction is happening using e-CNY or Alipay’s proprietary network, the end result is still the same and the user is indifferent to the technology being used. By driving more adoption, this strategy would also incentivize further development of apps using the e-CNY network, making the network more attractive for consumers as well.
Conclusion
The development of e-CNY shows that existing payments platforms can actually be a deterrent for CBDC adoption. Generally, people are not interested in the technicalities of digital currencies and if governments want to see viral adoption, their CBDC will need to solve people’s unique needs or they will need to exercise far-reaching powers to force adoption. Naturally, the latter is far easier, but has a lot of dangerous implications for privacy and personal freedoms. The Chinese government, for now, seems committed to the first path, and as new projects continue to surface and new use cases for the CBDC are developed, it is certainly an exciting time to be watching the e-CNY.
About Pratham Rawat ’24
Pratham Rawat ’24 is a class of 2024 student in the Cornell Ann S. Bowers College of Computing and Information Science. He is passionate about finance and technology and how expertise in both can be used to inform business, policy, and technical decision-making. He is working with support from the Cornell Undergraduate Fintech Fellowship sponsored by Fintech at Cornell in collaboration with the Emerging Markets Institute (EMI).
