China’s central bank is working with Ant, Tencent to develop digital currencies

China’s central bank has signed a strategic cooperation agreement with Ant Group, Alibaba Group’s fintech subsidiary, to help build a technical platform for its sovereign digital currency, state media reported.

China has been developing its electronic yuan, or e-CNY, since 2014 with the aim of replacing some of the cash in circulation. Instead of a timeline for its official launch, the digital cash will first be used for bulk payments domestically before being used abroad, Chinese authorities said.

The two sides will jointly drive the development of the e-CNY, which is based on Ant’s Ocean Base database and its mobile development platform mPaaS, according to the state tabloid Global times.

The planned e-CNY

The bank has also worked with Ant and Tencent to co-develop e-CNY over the past three years, the report added, citing information recently released by the country’s two largest e-payment providers.

The disclosure appears to indicate that both companies touted close ties with the regulator despite being the subject of intense anti-monopoly crackdowns and government investigations.

Analysts say the bank needs support from local fintech giants and big retailers to build infrastructure, including distribution channels for the national virtual currency, which is being tested in cities like Beijing, Shanghai and Shenzhen.

However, its success could result in these tech firms taking market share from them – a move observers argue would show that China has planned moves to crack down on monopolies and “nationalize” the treasuries of consumer financial data it owns.

Who is the boss?

“Chinese authorities are telling Ant to hand over your big data to the central bank. The data will not remain in private hands as the Communist Party is the boss,” said Francis Lun, CEO of Geo Securities Ltd. in Hong Kong, by phone to VOA.

The Financial Times has reported that Beijing has asked Ant to turn over its data to a new state-controlled credit scoring firm run by former central bank executives while serving other financial institutions, including competing with Ant’s loaner guns.

Ant insisted on running the company, arguing that too much government intervention would drag the industry down, according to news reports. But the regulator disagreed, saying Ant’s involvement in the new company would create a conflict of interest.

Lun said there was little Ant could do to resist the regulator’s request.

e-CNY perspectives

He also expects the e-CNY to be widely adopted as all banks in China are also required to comply with the regulator.

Lun said the domestic digital yuan will allow the government to monitor users’ every transaction “like a big brother.” Its use abroad will allow China to bypass the US dollar-dominated international settlement system, in what he called an attempt at de-dollarization.

However, Jerry Lin, director of the Financial Research Institute at the Taiwan Academy of Banking and Finance in Taipei, has doubts that the private sector will accept e-CNY as most private companies view cash flows as sensitive.

He said once a technical platform is finalized, the central bank will next work with retailers to expand distribution of e-CNY — a key step that will determine whether the virtual currency will be widely accepted.

According to Lin, the bank views its recent efforts to launch e-CNY as a win-win strategy for itself and the country’s fintech giants.

“By working with the central bank [to launch the e-CNY], these fintech giants will be relieved of the pressure in the regulator’s anti-monopoly investigation. Their monopoly is difficult to break unless a competitor as strong as e-CNY emerges, taking at least a third of the market share,” Lin told VOA.

Ant and Tencent control 54% and 40% of China’s e-payment market, respectively.

exchange

Lin said that in the short to medium term, it will also be in the interest of fintech companies to trade some of their stakes in China’s e-payment market in exchange for the regulator’s lenient treatment of their online microcredit, personal finance management and insurance operations that generate higher profits.

In the longer term, however, it is highly likely that China will seek to “nationalize” most financial services now dominated by private fintech companies, including e-payments, credit ratings or financial management, he added.

No distinction

Some have viewed China’s rapid digitization of its yuan as a threat to accelerate the US dollar’s decline in dominance as the world’s leading reserve currency, but New York-based Anne Stevenson-Yang, co-founder and research director of J Capital Research, disagreed.

“I think there is too much emphasis on the idea that this is a completely separate currency and they are in competition. I mean there is no difference between the DCEP [digital currency electronic payment for e-CNY] and the renminbi,” she said.

“Despite many explanations from China about the opening of the capital accounts, the reason why it is not used internationally, it remains in less than 2% of SWIFT payments by value, the reason is that China does not want to make it available.” They VOA said over the phone, referring to the Society for Worldwide Interbank Financial Telecommunication, the global system for financial messaging and cross-border payments.

She added that she believes China’s planned launch of e-CNY is purely for regulatory reasons, neither for reasons of innovation nor for rivalry with the US dollar.

China’s general public won’t notice any change, she said, because Ant’s Alipay or Tencent’s WeChat Pay will remain what consumers see, while the central bank is likely to work as a background engine for both fintech platforms.

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