The digital yuan struggles to find Chinese shoppers willing to spend it
The e-CNY is still having teething troubles on its fourth birthday, says Kai von Carnap. Beijing is adding enhancements in the hope that convenience trumps consumers’ privacy fears.
China’s digital yuan just turned four, but despite hundreds of millions in cash giveaways to pioneering users and zero transaction fees, the e-CNY is still far from widespread adoption. Only six million of 260 million registered users actively paid with the digital currency at the end of 2021 – a fraction of the billion devotees that transacted with Wechat and Alipay. It seems most early adopters spent the free cash and then stopped using the e-CNY. With many digital wallets holding only 3 e-CNY on average, there were only about 13.6 billion e-CNY in circulation in late 2022, less than 0.01% of cash in circulation. But Beijing is not giving up.
Many people are skeptical of the e-CNY and the app it relies to hold the digital cash withdrawn by users from their bank accounts. Mu Changchun, head of the digital currency research institute of the People’s Bank of China (PBoC), in July 2022 acknowledged “misunderstandings” that had led users to fear that adopting the e-CNY would turn every user into “a little ant with GPS installed”. He sought to comfort them with the observation that the digital currency’s controversial controlled anonymity meant the central bank and other authorities could only access personal information if they suspected a user had been party to an illegal transaction.
Another reason for the low adoption is that the e-CNY promises no knock-out new benefits. Every merchant that accepts e-CNY is outnumbered by 20 merchants accepting Alipay or WeChat. Anecdotal evidence suggests that people are hesitant to install another app alongside those two given the digital currency’s limited added value. Also, Beijing’s hope that the e-CNY will help China’s standing is not gaining much traction. While 59 percent of people surveyed by the firm Morning Consult said the e-CNY’s “major advantage” was fighting corruption and money laundering, only 41 percent said it would help China become a “global leader”.
Announced in 2019, the first digital currency to be issued by a major economy started life with test runs in Beijing and four provinces from April 2020. This expanded to include pilot programs in six further provinces a year later and a further six in 2022 (Exhibit 1). The e-CNY’s current third pilot stage is meant to win the trust of users and merchants. Despite the population’s muted uptake of the e-CNY, the leadership in Beijing is continuing with various measures to make a success out of declared flagship project for the party-state.
For one, after two years of Beijing’s crackdown on the tech sector, the majority of China's internet companies now support the party-state in promoting the “horizontal” interoperability of different payments systems alongside the vertical integration of their own. WeChat, China's largest social media platform with 1.26 billion users, recently joined the growing list of private companies that are integrating the e-CNY into their products services, other including food delivery service Meituan, entertainment company ByteDance, and phone maker Huawei.
Pilot programs are testing new features like smart contracts
But more important are large-scale pilots in 17 provinces. Jiangsu, home to 80 million people, for example, recently published a comprehensive development plan with the goal of becoming a “complete e-CNY province” by 2025. In parallel, dozens of smaller regional pilot programs are taking place, including a digital lending project around e-CNY-denominated loans in Xinjiang, e-CNY-denominated car loans in Shaanxi, and digital-currency settlements to allow international trading on the Wuhan-based trade platform "Silk Road Connect" (通丝路).
As the e-CNY pilot program has grown, technological and financial sophistication to boost the currency’s usefulness has come in the form of smart contracts. Programs stored on a blockchain that run when agreed conditions are met, such contracts allow for tailor-made financial instruments and precise management of transactions. Self-executing contracts eliminate many classic banking functions – the need for manual processing and co-ordination and reduce the risk of administrative errors. Smart contracts also offer unparalleled transparency for all parties involved, including the central bank.
Authorities are using smart contracts to experiment with targeted boosts of consumption. During the 2023 Spring Festival, for example, they distributed millions of consumption vouchers (数字人民币消费券) of 20-200 e-CNY as targeted subsidies in ten pilot areas. Smart contracts allowed the recipients to spend it in only a select group of local small- and medium-sized enterprises. Tianjin gave away e-CNY 100 million to support local hot-pot restaurants and Qingdao e-CNY 13 million for its Oktoberfest activities.
The programmability of e-CNY smart contracts is also being harnessed for managing apartment rents and the payment of monthly salaries to civil servants and construction workers. Both the central bank and industry have said they would like to see smart contracts and how to program them explored further. This could see the integration of spending criteria, expiration dates, and law enforcement initiatives like Xi's Three Antis, "三反"– anti-money laundering, anti-terrorism financing, and anti-tax evasion measures.
New smart money for smart canteens in smart cities
Increased technological and financial sophistication is also leading to the integration of the e-CNY into China’s cyber-physical systems of so-called smart city infrastructure. In zones piloting such features, access to public services is increasingly negotiated through government payment apps based on e-CNY, sidelining third-party payment providers, such as Alipay. Public transport systems in Shanghai, Fuzhou, and Tianjin, and smart schools in Hainan – educational institutions with integrated advanced technologies to enhance teaching and learning like AI and big data analytics – allow and often incentivize e-CNY payments.
The smart city integration has seen some smart canteens and smart schools turn to face-recognition technology (FRT) to offer password-free, “seamless” payment methods (免密登录、刷脸支付). Strategic cooperation agreements between the PBoC and tech specialists like SenseTime and some US blockchain companies are crucial in developing such solutions that combine biometric recognition, digital identities, AI, and e-CNY payments. In this context, FRT links every transaction to a particular user, putting an end to the absolute anonymity of cash.
Beijing’s bet is that the convenience of seamless payments will eventually see the population forget its worries about the e-CNY’s only-ever-temporary anonymity. FRT-linked e-CNY payments will give authorities a new form of control over individuals who use China’s digital currency – all the more worrying, as the e-CNY is designed to take immediate legal action in the case of a user breaking the law, such as the freezing of funds. The future of the e-CNY hinges on its ability to overcome user skepticism and provide tangible advantages that outweigh concerns about privacy and surveillance.