How will China’s sovereign digital currency affect fintech? – The diplomat
Pacific money | business | East asia
China’s sovereign digital currency is likely to have a mostly positive impact on the fintech sector.
China’s sovereign digital currency is still in the testing phase, but has sparked speculation about what impact it will have on fintech. Some experts have claimed that digital currency will supplant WeChat Pay and Alipay payment methods. Others have stated that because it is electronic, China’s sovereign digital currency will boost the fintech industry as a whole. So how can we reasonably predict how the digital currency will affect China’s fintech industry?
First, let’s look at the WeChat Pay and Alipay payment methods. China is already becoming an increasingly cashless society, with four out of five payments being cashless. The use of the digital currency will continue to drive this trend. The digital currency will be usable through WeChat Pay and Alipay and other digital payment methods, and regulators have stated that the sovereign digital currency is not intended to replace these payment channels. However, since the use of the sovereign digital currency requires the use of a digital wallet issued by a bank or other entity, these new digital wallets containing the sovereign digital currency can actually create competition for existing payment channels. To what extent the digital currency will create competition or complementarities with WeChat Pay and Alipay is not yet clear – but the realization is that China will become even more of a cashless society and WeChat Pay and Alipay will remain important players in the digital payment space.
Second, let’s look at online fintech lending. Fintech firms (like banks) cannot offer interest on government digital currency deposits and it seems unlikely that they would loan direct cash, although customers may be able to withdraw / convert funds in government digital currency (cash). However, this is not strictly necessary for most day-to-day transactions as China already has the financial infrastructure to accept electronic bank payments without the intermediate step of switching to digital cash. Small business wages can also be paid out digitally. For the purchase of goods or services on the black market, the conversion of borrowed funds into cash could have taken place, but due to the traceability of the digital currency, customers are unlikely to engage in this activity.
Thirdly, additional cross-border fintech applications or new functions for existing applications may emerge in order to enable easier use of the sovereign digital currency for cross-border payments. One of the biggest problems cross-border financial firms generally face is the need to comply with legal regulations, and it is likely that cross-border transactions using state digital currency will come with additional regulations to ensure the proper transfer or exchange of currency to ensure. If the sovereign digital currency is internationally transferable, the Chinese fintech application must also ensure that the foreign recipient can accept ownership of the digital currency and rename it accordingly.
Fourth, with the advent of sovereign digital currency, the use of fintech is likely to increase as people without a bank account can access the digital currency and are therefore willing to use other fintech products. Those who don’t have a bank account can use the digital currency for payments, and their digital wallets can receive funds, bringing these people into the larger fintech environment.
Fintech firms must ensure that there are no security gaps in their interaction with sovereign digital currency wallets or in the use of the digital currency itself. It is likely that additional regulations will be put in place to ensure that the use of the sovereign digital currency remains secure when processed by third-party applications. Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, has generally stated that network and data security are essential. We can expect additional rules in the near future.
To sum up, China’s sovereign digital currency is likely to have mostly positive effects on the fintech sector by increasing the use of digital payments, boosting cross-border payment applications and expanding access to fintech for non-bankers. The direct impact of the digital currency on online lending is expected to be largely neutral. Over time, the portability of digital currency between interest-bearing and non-interest-bearing accounts will become clearer. The use of the sovereign digital currency will create complementarities between China’s highly digitized fintech sector and the monetary system.