For the past decade, private companies in China have led the way in the digitization of money, with Tencent Holdings Ltd. and Ant Group Co. setting up enormous private payment networks and cryptocurrency-mining operations providing the fuel for the global Bitcoin boom. Their emergence was a break from Chinese financial history, which has been marked by aggressive centralized control. Things may now be reverting to the norm.
“Over the last few years of this internet-technology boom, private companies have swallowed up the markets where regulators fall behind,” says He Yifan, the founder and chief executive officer of blockchain startup Red Date Technology Co., which works closely with China’s top economic planning agency. “But at the end of day, the Chinese government will step up and rein it in regardless.”
This spring, Chinese regulators took their strongest actions yet to cut down on cryptocurrency mining, the bookkeeping system that’s the foundation of Bitcoin and other blockchain-based currencies, sending some of the biggest players fleeing to Canada, Russia, and other countries. In April 2020, China also began testing its own electronic currency—the e-CNY, or digital yuan—a project that could put the government in more direct competition both with cryptocurrencies and with corporate payments systems.
The rollout of the digital currency corresponds with a broader push to exert control over tech companies by, for instance, forcing payment businesses to submit to traditional banking regulations. The e-CNY can provide a backup to the inherently unpredictable private systems, Mu Changchun, head of the digital currency research wing of the People’s Bank of China, said at an event in March. “If something bad happens to them, financially or technically, that could bring a negative impact on the financial system’s stability in China,” he said.
If the e-CNY does catch on, the central bank could suck deposits out of Ant’s and Tencent’s networks, crippling their lucrative businesses of lending and wealth management. But the two companies may have no choice but to cooperate. Both have said they’re working with the government on the e-CNY, without sharing details. Mu says digital yuan won’t replace WeChat Pay or Alipay, which make up about 90% of China’s $35 trillion mobile payment market, according to Bloomberg Intelligence. Bloomberg estimates the e-CNY could capture about 9% of China’s market by 2025.
The digital currency could also afford the government a level of surveillance that isn’t possible with cash or independent digital currencies. This could be useful for combating money laundering, tax evasion, illegal gambling, and other illicit activities. It also raises concerns about the potential of the currency as a tool for political repression. Yao Qian, former director of the digital currency institute at the People’s Bank of China, said in May that it wasn’t the bank’s intention to observe all transactions in real time.
So far, China has tried to persuade people to adopt the digital currency rather than force them. It’s given away millions of dollars’ worth of free money, which people can spend in stores, including the China-based locations of American companies including Walmart Inc. and McDonald’s Corp. Internet companies such as e-commerce site JD.com Inc. and travel-booking site Trip.com Group Ltd. are also testing digital yuan as a payment method inside their apps. And the local government in Xiong’an, a government-planned urban area and innovation hub being built near Beijing, has paid some workers in digital currency. A bigger rollout is planned for the 2022 Winter Olympics.