An e-CNY experience center in Hangzhou, Zhejiang Province Photo: CFP

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Since 2014, the development of China’s digital yuan has proceeded through the stages of theoretical research, framework design, to project development. Since entering its testing phase in 2019, the digital currency’s adoption has grown steadily. Following a phased implementation scheme, China has begun to trial its digital fiat money in wider application scenarios, leading to a significant boost in the digital yuan’s popularity and impact. In particular, the digital currency has earned full recognition of its two-tiered operational mode, its wallet matrix, and its related ecology and technical framework. Positioned as a new retail fiat digital currency, the digital yuan is safe, current, and inclusive. It is well-positioned to help China carry out its economic and financial policies.

Inclusive finance, rural revitalization

The digital yuan is fueling inclusive finance and rural revitalization. The rapid iteration and wider use of digital technology can reduce information asymmetry, and consequently improve the efficiency of inclusive finance. The trials of the digital RMB have fully verified its effectiveness in this regard. As a new retail payment infrastructure, the digital yuan is intended to exemplify “safe and inclusive” as its primary principle. After all, e-CNY makes financial services more accessible. Its loosely coupled account system enables users in remote areas to set up and use a digital RMB wallet without having to hold a traditional bank account, which expands the coverage of basic financial services. For instance, to some extent, digital yuan can help bridge the digital divide. As an example, digital yuan embedded in wearable devices like smart watches, bracelets, and walking sticks can be more easily used by specific groups such as the elderly and people with disabilities. In this way, digital payment is made more accessible and digital technology more humanistic. 

Meanwhile, the inclusive digital currency also empowers rural revitalization through improving rural financial service. As e-CNY explores more application scenarios, rural residents are beginning to access convenient financial services without transaction fees, including real-time transfers and “double offline payments.” The low-cost yet efficient digital currency can also be used by the government to release funds. The digital yuan assists policy facilitation and precision while immensely reducing the cost of implementing policies which strengthen agriculture, benefit farmers, and enrich rural areas. 

 

Consumption and economic recovery

Digital yuan can help stimulate consumption and speed up economic recovery. Studies show that distributing consumer coupons in targeted industries can effectively encourage consumption needs, boost spending, and in turn, drive economic growth. In the first half of 2022, to cushion the blow of COVID-19, many local governments implemented policies to stimulate the economy through boosting consumption. During this period, digital yuan pilot regions carried out “red envelope” campaigns [a traditional method for delivering monetary gifts, now done electronically] and consumption-stimulus policies. For example, since June, 2022, digital currency worth 300 million yuan in digital currency was distributed via “red envelopes” to residents in cities including Beijing, Chengdu, Guangzhou, Fuzhou, Wenzhou, and Shaoxing. The campaign demonstrated that distribution of red envelopes containing digital yuan can indeed drive consumption as effectively as traditional coupons. Furthermore, issuing red envelopes can help us better evaluate policies aimed at supporting industries, so that we can speed up consumer market recovery through the supply side and demand side, and eventually expand domestic demand and improve the economy. The red envelopes’ strong pull on consumption is particularly powerful thanks to the popularity the digital yuan accumulated in early stages, the rich experience gathered when exploring various spending scenarios, as well as the well-established ecology for the digital yuan wallet. 

Some have compared giving out digital yuan in red envelopes to the practice in some Western countries of “helicopter money” –cash subsidies that are distributed directly to individuals to stimulate consumption. However, the two are fundamentally different. “Helicopter money” is a rescue policy based on the monetization of financial deficit, a modern monetary theory. It essentially is an expansionary monetary policy in the form of public finance-liabilities. Whereas issuing digital yuan via red envelopes is essentially a fiscal subsidy, or surrendered profits from businesses which does not increase monetary supply. In addition, as digital yuan is traceable, giving out red envelopes can be effective on both consumer market and enterprises, as the digital currency improves the consumer market monitoring and operational markets, reduces enterprises’ operational costs, and increases trade efficiency. 

 

Technological innovation, industrial upgrade 

Digital RMB can also fuel technological innovation and industrial upgrade. According to research by institutions including the Bank for International Settlements (BIS) on Central Bank Digital Currency (CBDC)’s choice of technical routes, different countries and different types of CBDC have distinctively different frameworks for technical systems. As a typical retail CBDC, the digital yuan system integrates the features of both a centralized system and a distributed system. It is a hybrid technological framework where “steady modes” and “agile modes” coexist, and a centralized system and a distributed system develop in an integrative way. The digital yuan follows technology’s route of “long-term evolution, continuous iteration, and dynamic upgrading.” During the trials, the digital currency’s wallet matrix, product design, performance in different scenarios, security encryption, and cross-border applications all show that the digital currency can be applied in an innovative way. It also confirms China’s capacity for independent innovation in underlying technologies like Block chain. 

Currently, technological applications like smart contracts are expanding their coverage, as the platform’s scale effect gradually manifests itself. In areas like advanced fund management, targeted payment, and fund settlement, the service platform for smart contracts in digital yuan can provide efficient and convenient tools for enterprises as they go through digitization. In the future, as more institutions take part in the R&D and gain access to the digital currency, more technology spillover effects will emerge, driving upgrades of related industrial and supply chains. 

Meanwhile, in the two-tier operational mode, many institutions in the middle tier, including designated operational institutions, commercial banks, third-party payment agencies, clearing houses, platform enterprises, and tech companies, can all leverage their technological strength to enhance R&D in digital technology based on the digital yuan’s openness and inclusiveness. As the digital currency becomes more popularized, technical demands like smart contracts, software systems, security encryption, and terminal hardware will also grow in tandem. In this way, digital yuan will fully play its role as an innovation-driver. Still, it is necessary to further clarify the technological standards in e-CNY wallet management, scenario integration, privacy protection, etc. It is necessary to adhere to legalization and normalization as the country builds a more regulated legal system for digital fiat currency. 

Lower financial risk

The digital yuan can also help improve cross-border payment, and reduce financial risk. Research and practices in various countries all indicate that CBDC improves the efficiency and safety of cross-border payment. With a point-to-point payment mechanism, CBDC is settled upon payment, which can significantly improve the financial liquidity of financial establishments as they handle cross-border payment and settlement. This can also compress the process of account checking during cross-border e-commerce settlement, thereby improving efficiency and reducing the cost of fund holdings. The CBDC digital technology can also enhance regulation on transaction settlements, thus reducing various types of settlement risks while increasing the transparency of capital transfer. 

Step by step, digital yuan has expanded its application in cross-border payment. In Feb, 2021, the People’s Bank of China, the BIS Innovation Hub Centre in Hong Kong SAR, Central Bank of Thailand, Central Bank of the U.A.E, and Hong Kong Monetary Authority jointly initiated “Project mBridge.” The project mainly aims to tackle trigger points such as high costs, low speed, and complex operation, through designing and iterating next-generation efficient infrastructure for cross-border payment. In Nov, 2021, 15 scenarios tests were launched, containing cross-border trade settlement, cross-border e-commerce, and supply chain finance. 22 financial institutions took part in the tests. While the existing cross-border systems center on the Society For Worldwide Interbank Financial Telecommunication (SWIFT), using digital yuan can reduce the RMB’s reliance on SWIFT, to increase currency internationalization. Going forward, more application scenarios in cross-border payment will be explored for e-CNY. The efforts will prove highly meaningful as RMB becomes more competitive globally and China’s financial system safer. 

After a long, comprehensive, and orderly process of R&D, design, and trials, the operational framework of digital yuan is proven effective in preventing related risks, potential impacts, and can help the government carry out financial and economic policies. Looking ahead, until the digital yuan is fully popularized following the steady process of pilot tests, further efforts are needed to make the e-currency more marketized, legalized, standardized, and sustainable. We need to pay attention to building differentiated scenarios in different districts, and continue to optimize the design of specific mechanisms for the two-tier operation system. It is also important to work on the digital currency’s technological standards, so as to establish a leading position for digital yuan in the global stage of CBDCs.

Song Lu is an assistant to the dean at the National Academy of Development and Strategy under the Renmin University of China (RUC), and Li Jialin is from the School of Applied Economics at RUC. 

Edited by WENG RONG