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China Meets Digital Currency: E-CNY and Its Implications for Businesses

Authors:
  • Yong Pung How School of Law, Singapore Management University
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Abstract

China is likely to be the first major economy to issue central bank digital currency (CBDC). China's CBDC, e-CNY, may lead to a new ecosystem that would profoundly affect business, product offerings and business practice. E-CNY is likely to affect both local and international businesses, particularly those with a presence in China or those who commonly transact with Chinese actors. There is also the possibility of e-CNY use outside of China. If China's CBDC practice and standards affect international practice (such as through standard making), e-CNY has the potential to affect the broader businesses community. This paper discusses the following crucial questions: how to understand e-CNY? What does e-CNY mean for local and international businesses? Businesses need to adequately prepare for a new business landscape with e-CNY that is not only a currency but also generates large amounts of data.
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China Meets Digital Currency: E-CNY and Its Implications for Businesses
Heng Wang
The Law Gazette (forthcoming, Nov. 2021)
Abstract: China is likely to be the first major economy to issue central bank digital currency
(CBDC). China’s CBDC, e-CNY, may lead to a new ecosystem that would profoundly affect
business, product offerings and business practice. E-CNY is likely to affect both local and
international businesses, particularly those with a presence in China or those who
commonly transact with Chinese actors. There is also the possibility of e-CNY use outside of
China. If China’s CBDC practice and standards affect international practice (such as through
standard making), e-CNY has the potential to affect the broader businesses community. This
paper discusses the following crucial questions: how to understand e-CNY? What does e-
CNY mean for local and international businesses? Businesses need to adequately prepare
for a new business landscape with e-CNY that is not only a currency but also generates large
amounts of data.
Key words: CBDC, e-CNY, DCEP, digital currency, businesses
1. Introduction ....................................................................................................................... 1
2. Understanding e-CNY ......................................................................................................... 3
2.1 A “centralized management model” ......................................................................... 3
2.2 A two-layer system .................................................................................................... 4
2.3 Digital wallet .............................................................................................................. 5
2.4 Managed anonymity .................................................................................................. 6
3. What does e-CNY mean? ................................................................................................... 6
3.1 China’s unique CBDC approach.................................................................................. 6
3.2 The implications for businesses ................................................................................. 8
3.3 The implications for international business ............................................................ 10
4. Conclusion ........................................................................................................................ 11
1. Introduction
Central bank digital currency (CBDC), also known as sovereign digital currency and
digital fiat currency, is the digital version of sovereign currency issued by an economy’s
Heng Wang, Professor, School of Private and Commercial Law, and Co-Director, Herbert Smith Freehills CIBEL
(China International Business and Economic Law) Centre, UNSW Law & Justice. Email:
heng.wang1@unsw.edu.au. The author is grateful to Layton Hubble for the excellent assistance and
comments.
2
monetary authority.
1
The introduction of CBDCs and their technical designs will carry
significant “policy and legal implications” for domestic and international businesses alike.
2
China’s CBDC is termed as e-CNY, digital yuan, digital RMB and digital CNY. E-CNY was
also previously known as the Digital Currency/Electronic Payment (DC/EP or DCEP).
3
DCEP is
also used to refer to the payment network as a whole. China’s CBDC will be a cash-like
liability of the central bank available to the public and foreign visitors.
4
China’s CBDC is not
only a digital currency and an electronic payment instrument,
5
but a research and
development project for the People’s Bank of China (PBOC), China’s central bank.
6
Domestically, e-CNY is “likely to become an important feature of China’s digital economy
and financial system”.
7
Like physical RMB, e-CNY is the legal tender in China issued by the
PBOC. It contrasts with private cryptocurrencies like Bitcoin and Diem (previously known as
Libra), which can be rejected as a form of payment.
8
China’s CBDC is intended to be “mainly
a substitute for cash in circulation (M0), and will coexist with physical RMB.
9
China’s CBDC is “at the most advanced stage” across all existing CBDC projects,
10
with
pilots being conducted in ten regions (e.g. Shenzhen) and the Beijing Winter Olympics use
cases.
11
It is estimated that “the total size of China’s digital currency could reach 1 trillion
yuan (US$140 billion) over the coming years, equivalent to digitalising around one eighth of
China’s cash”.
12
International consumer brands, including McDonald’s, Starbucks, Subway,
have also been involved in the e-CNY trial.
13
e-CNY has been used in various contexts,
including paying travel subsidies to public servants.
14
1
John Kiff, et al., A Survey of Research on Retail Central Bank Digital Currency, IMF WORKING PAPER NO. 20/104,
5 (2020).
2
Yves Mersch, Yves Mersch: An ECB Digital Currency a Flight of Fancy?(2020), available at
https://www.bis.org/review/r200511a.pdf.
3
Changchun Mu, Digital Currency Institute of the People's Bank of China, in INTHANON-LIONROCK TO MBRIDGE:
BUILDING A MULTI CBDC PLATFORM FOR INTERNATIONAL PAYMENTS 13, (BIS Innovation Hub Hong Kong Centre, et al.
eds., 2021).
4
Raphael Auer, et al., Rise of the Central Bank Digital Currencies: Drivers, Approaches and Technologies, BIS
WORKING PAPERS NO 880, 6 (2020).
5
Yanting Wu, Why Does the Digital RMB Accelerate?, OUTLOOK WEEKLY (2021).
6
Xiaochuan Zhou, Understanding China’s Central Bank Digital Currency(2020), available at
http://www.cf40.com/en/news_detail/11481.html.
7
David Olsson, et al., China’s Digital RMB – Is Your Business Ready?(2021), available at
https://www.kwm.com/en/au/knowledge/insights/chinas-digital-rmb-is-your-business-ready-20210427.
8
Jiaying Jiang & Karman Lucero, Background and Implications of China’s E-CNY, 2 (2021).
9
Working Group on E-CNY Research and Development of the People's Bank of China, Progress of Research &
Development of E-CNY in China, 3 (2021).
10
Auer, et al., BIS WORKING PAPERS NO 880, 22 (2020).
11
Mu, 13. 2021.
12
Karen Yeung, What Is China’s Sovereign Digital Currency?(2020), available at
https://www.scmp.com/economy/china-economy/article/3083952/what-chinas-cryptocurrency-sovereign-
digital-currency-and-why.
13
Frank Tang, China Includes McDonald’s, Starbucks, Subway on List of Foreign Firms to Test Digital
Currency(2020), available at https://sg.news.yahoo.com/mcdonald-starbucks-subway-among-foreign-
113523567.html.
14
Karen Yeung & Andrew Mullen, China Digital Currency: When Will the E-Yuan Be Launched, and What Will It
Be Used For?(2021), available at https://www.scmp.com/economy/china-economy/article/3135886/china-
digital-currency-when-will-e-yuan-be-launched-and-what.
3
Internationally, it has long been predicted that China “will be the first major country” to
launch CBDC.
15
CNY currently accounts for approximately 4% of global transactions,
16
making China’s CBDC among “the potential major currency CBDC[s] with global
implications”.
17
E-CNY is likely to be a game changer in international commerce,
18
and affect
international transaction systems.
19
For CBDC, it is observed that “[w]hatever the Chinese
do will affect other national economies”.
20
China may selectively reshape international
economic governance through CBDC practice and its participation in future international
standard setting.
21
E-CNY is likely to evolve over time. For instance, e-CNY could deploy smart contracts, a
concept explored in the e-CNY pilot.
22
Theoretically, smart contracts could interact with the
programmed provision of subsidies or allowances to restrict the use of proceeds or create
deadlines for such usage.
23
This piece will first explore how to understand e-CNY and will provide a brief overview of
its structure. The piece then discusses what e-CNY will mean for businesses.
2. Understanding e-CNY
It is not easy to fully understand e-CNY. For instance, e-CNY has been described as being
“based on broad accounts, loosely coupled with bank accounts and has its system of
value.
24
However, it is not immediately clear exactly what “loosely-coupled account
linkage” means.
25
This piece will briefly discuss the management model and layered system
of e-CNY, along with its digital wallet system and managed anonymity.
2.1 A “centralized management model”
China’s CBDC features a “centralized management model” (PBOC issuing CBDC and
being at the centre of the CBDC operational system).
26
The PBOC manages the whole life
cycle of CBDC
27
and is responsible for cross-institutional connectivity,
28
meaning that all
cross-institutional transactions need to go through the PBOC for the value transfer to
15
Bailey Reutzel & Pete Rizzo, Most Influential in Blockchain 2017 #6: Yao Qian(2017), available at
https://www.coindesk.com/coindesk-most-influential-2017-6-yao-qian/.
16
Wilson Chow & Vicki Huff Eckert, China and the Race for the Future of Money(2021), available at
https://www.pwc.com/gx/en/issues/reinventing-the-future/take-on-tomorrow/china-future-money.html.
17
Dirk A. Zetzsche, et al., Sovereign Digital Currencies: The Future of Money and Payments?, UNIVERSITY OF HONG
KONG FACULTY OF LAW RESEARCH PAPER NO. 2020/053 1, 11 (2020).
18
Olsson, et al. 2021.
19
Briana Boland, China Bulletin: Local and Geopolitical Implications of the Digital Yuan, DENTONS FLASHPOINT, 14
(2021).
20
Vipin Bharathan, E-CNY Progress Report Reveals Telling Details About The Chinese Retail CBDC Project(2021),
available at https://www.forbes.com/sites/vipinbharathan/2021/07/19/e-cny-progress-report-reveals-telling-
details-about-the-chinese-retail-cbdc-project/?sh=1975aa6b6a59.
21
Heng Wang, Selective Reshaping: China’s Paradigm Shift in International Economic Governance, 23 JOURNAL
OF INTERNATIONAL ECONOMIC LAW 583, 593 (2020).
22
Working Group on E-CNY Research and Development of the People's Bank of China, 8, 14 (2021).
23
Olsson, et al. 2021.
24
Working Group on E-CNY Research and Development of the People's Bank of China, 6 (2021).
25
Bharathan. 2021.
26
Working Group on E-CNY Research and Development of the People's Bank of China, 3 (2021).
27
Id. at.
28
Id. at, 8.
4
occur.
29
For e-CNY wallets as discussed below, the PBOC is responsible for “wallet
ecosystem management” and making e-CNY wallet rules.
30
E-CNY wallets are subject to
both centralized management” and unified cognition.
31
CBDC operating agencies “submit transaction data to the central bank via asynchronous
transmission on a timely basis”, enabling the central bank to “keep track of necessary
data.
32
E-CNY would revolutionise the regulators capacity to “scrutinise the nation’s
payment and financial system with additional powers to track how money is used.
33
E-CNY
is to provide China visibility into the use of e-CNY and allow China to use big data
generated from e-CNY transactions.
34
Essentially, the centralised system of E-CNY contrasts
with private cryptocurrencies that are “designed to disperse power away from the
government.
35
2.2 A two-layer system
China’s CBDC features a two-layer, hybrid operational system that deals with issuance
and circulation respectively.
36
In the first layer, the PBOC issues e-CNY to second-tier
institutions (e.g. currently six major state-owned banks, and two internet banks). In the
second layer, second-tier institutions circulate the e-CNY to retail market actors including
the public.
37
For this two-layer system, the PBOC issues CBDC to authorised operators (also termed
as operating institutions, “Tier 2 institutions”, second-tier institutions),
38
which are
commercial banks selected on various criteria (e.g. capital, technology).
39
Authorised
operators will lead the CBDC exchange services
40
and circulation services.
41
These
authorised operators are e-CNY wallet distributors.
42
A user needs to go to one of these
authorised operators to open an e-CNY digital wallet.
43
Subject to the PBOC’s “centralized
management”, other commercial banks and institutions will also join to provide e-CNY
circulation services.
44
After the e-CNY wallet is opened, the user can access a variety of
services provided by both the issuing bank (one of the Tier 2 institutions) as well as other
banks and payment service providers. These other banks and providers are Tier 2.5
institutions” (or related commercial institutions) that can supply payment and other services
29
Guohui Li & Meiruo Ma, Positive Progress Has Been Made in the E-CNY Research & Development Pilot:
Central Bank Held a Media Briefing on the White Paper on Progress of Research & Development of E-CNY in
China(2021), available at https://www.financialnews.com.cn/jg/dt/202107/t20210719_223623.html.
30
Working Group on E-CNY Research and Development of the People's Bank of China, 8, 9 (2021).
31
Id. at, 8-9.
32
Yifei Fan, Some Thoughts on CBDC Operations in China(2020), available at
https://www.centralbanking.com/fintech/cbdc/7511376/some-thoughts-on-cbdc-operations-in-china.
33
Yeung. 2020.
34
Olsson, et al. 2021.
35
Yeung. 2020.
36
Working Group on E-CNY Research and Development of the People's Bank of China, 3 (2021).
37
Mu, 13. 2021.
38
Working Group on E-CNY Research and Development of the People's Bank of China, 3 (2021);Deutsche Bank
Research, Digital Yuan: What Is It and How Does It Work?(2021), available at
https://www.db.com/news/detail/20210714-digital-yuan-what-is-it-and-how-does-it-work.
39
Working Group on E-CNY Research and Development of the People's Bank of China, 8 (2021).
40
Id. at.
41
Li & Ma. 2021.
42
Ajay S. Mookerjee, What If Central Banks Issued Digital Currency?(2021), available at
https://hbr.org/2021/10/what-if-central-banks-issued-digital-currency.
43
Deutsche Bank Research. 2021.
44
Working Group on E-CNY Research and Development of the People's Bank of China, 8 (2021).
5
to e-CNY holders but cannot provide e-CNY exchange services.
45
Authorised operators and
“related commercial institutions jointly provide e-CNY circulation services and retail
management, including innovation on payment product design, system development,
scenario expansion, marketing, business processing as well as operation and
maintenance.
46
A more detailed structure of e-CNY is illustrated in the Table 1 (below).
Table 1: The structure of e-CNY
Deutsche Bank Research, Digital Yuan: What Is It and How Does It Work?(2021),
https://www.db.com/news/detail/20210714-digital-yuan-what-is-it-and-how-does-it-work
What is the relationship between the central bank and second-tier institutions? A
commercial bank may be regarded as the “agent bank” of the central bank in this context.
47
Former PBOC governor Zhou Xiaochuan referred to the view that commercial banks issuing
CBDC are like giving out envelopes; the banknotes in the envelope are the banknotes of the
central bank, but commercial banks can have different envelop designs and anti-
counterfeiting features.
48
However, he indicated that this metaphor is not accurate and
clarified that “what’s inside the envelope can be the central bank currency, a central bank-
issued reserve certificate or comfort letter, or even something designed by a commercial
bank” and that “the first responsible entity is the second-tier institutions, not the central
bank”.
49
Second-tier institutions perform obligations like investing in equipment and
technology and undertaking anti-money laundering controls (e.g. customer due diligence,
reporting suspicious and large-value transactions, keeping customers’ identity data and
transaction records).
50
2.3 Digital wallet
There is an e-CNY digital wallet ecosystem,
51
which appears to consist of three layers: (i)
the PBOC setting the rules; (ii) authorised operators, which include select banks, offering
basic functions”; and (iii) authorised operators working with “relevant market players to
further develop various payment and financial products.
52
Digital wallets differ from bank
45
Deutsche Bank Research. 2021.
46
Working Group on E-CNY Research and Development of the People's Bank of China, 8 (2021).
47
Steven L. Schwarcz, Regulating Digital Currencies: Towards an Analytical Framework, DUKE LAW SCHOOL PUBLIC
LAW & LEGAL THEORY SERIES NO. 2021-09 1, 11 (2021).
48
Zhou. 2020.
49
Id. at.
50
Mu, 13. 2021;Working Group on E-CNY Research and Development of the People's Bank of China, 10 (2021).
51
Working Group on E-CNY Research and Development of the People's Bank of China, 6 (2021).
52
Id. at, 9-10.
6
deposit accounts: “the balance in a bank deposit account represents a liability of the bank,
whereas a DCEP in a digital wallet (both the digital RMB wallet and the sub-wallet)
represents a direct liability of the PBOC, and the digital wallet offered by the bank is just an
interface to allow users to access their DCEP.
53
Authorised operators “jointly develop and share apps on mobile devices” and “manage
wallets, authenticate e-CNY, and develop wallet ecological platforms to enable operator-
specific visual system[s] and special features as well as online and offline applications in all
scenarios.
54
End users will download a PBOC-authorised digital wallet application which
may be linked with a bank account.
55
The services provided by e-CNY wallets then enable
end users to conduct electronic transactions and store their payment data.
56
2.4 Managed anonymity
Managed anonymity is a major feature of e-CNY.
57
When using an e-CNY wallet app where
the user’s identity has been verified, the PBOC is to know the user’s identity.
58
However,
transactions conducted through the e-CNY wallet app will only transmit the wallet ID, with
neither the other transaction parties nor the sub-wallet account bank knowing the user’s
identity.
59
This means that users could hide their identity from counterparties, making it
more difficult for online platforms to collect user information.
60
The regulation of e-CNY in
this regard is yet to be seen. For instance, it is not clear whether and how existing rules on
the sharing of government information among government agencies (e.g. the Notice of the
State Council on Issuing the Interim Measures for the Administration of Sharing of
Government Information Resources, and Guidelines for the Preparation of Catalogues of
Government Information Resources) will apply to e-CNY.
61
3. What does e-CNY mean?
To understand what e-CNY means for domestic and international business, business
leaders first need to understand China’s unique approach to CBDC.
3.1 China’s unique CBDC approach
On one hand, China’s CBDC shares similarities with other CBDCs. For example, CBDCs
generally may create “new monetary policy levers” and “currency with time limits or other
spending conditions (e.g. required spending on durable goods)” that can create highly
targeted monetary interventions in a national economy.
62
On the other hand, China’s CBDC pathway is likely to differ from other states in terms of
its regulations (e.g. privacy, the attitude towards private cryptocurrencies) and technical
design. A state’s approach to CBDC reflects their “political-economic priorities and
53
Olsson, et al. 2021.
54
Working Group on E-CNY Research and Development of the People's Bank of China, 9 (2021).
55
Yeung & Mullen. 2021.
56
Coco Feng, Fintech Giant Ant Group’s Mybank Joins China’s Digital Yuan Platform(2021), available at
https://www.scmp.com/tech/big-tech/article/3133227/fintech-giant-ant-groups-mybank-joins-chinas-digital-
yuan-platform?module=perpetual_scroll&pgtype=article&campaign=3133227.
57
Working Group on E-CNY Research and Development of the People's Bank of China, 13 (2021).
58
Olsson, et al. 2021.
59
Id. at.
60
Deutsche Bank Research. 2021.
61
Jiang & Lucero, 18 (2021).
62
Sarah Allen, et al., Design Choices for Central Bank Digital Currency(2020), available at
https://www.brookings.edu/blog/up-front/2020/07/23/design-choices-for-central-bank-digital-currency/.
7
features”.
63
China’s CBDC echoes China’s state-led economy through, inter alia,
“centralis[ing] control of the underlying monetary instrument across all payment systems”
and “controlling currency inflows and outflows into the RMB area”.
64
The crackdown on private cryptocurrencies is a unique aspect of China’s CBDC approach.
China’s CBDC approach should be viewed with a functional lens, including the attitude
towards private cryptocurrencies that are regarded as the opposite of CBDC.
65
It seems that
e-CNY is partially driven by the response to Diem, the global stablecoin, and capital flight.
66
China’s crackdown on private cryptocurrencies is reflected in the Law of the People’s Bank
of China (Amendment Draft for Consultation)(Draft) which proposes to forbid substitute
currencies in digital and physical forms (including RMB-pegged digital tokens).
67
It is
observed that the PBOC “would frown upon any stablecoins pegged to the renminbi”.
68
Meanwhile, it proposes to extend the forms of RMB to a digital one and legalise China’s
CBDC.
69
More recently, China has prohibited all activities concerning private virtual
currencies through a notice issued by ten agencies including the Supreme People’s Court.
70
This would affect not only administrative decisions but also court judgments. This
prohibition on cryptocurrencies differs from many other economies where CBDC and
private digital currencies could co-exist.
Other differences in China’s CBDC approach include the role of second-tier institutions
and e-CNY’s nature mainly as a retail CBDC. According to Zhou Xiaochuan, former Governor
of the PBOC, one of major differences between China and the G7 in terms of CBDC is that
second-tier institutions are expected to play a greater role and take more responsibilities
and that DC/EP pays more attention to improving the domestic retail payment system.
71
Research on CBDC by many advanced economies has focused on wholesale CBDC, whereas
China is leading the development of retail CBDCs.
72
As a complement to or substitute for
63
Ashton de Silva, et al., Central Bank Digital Currencies (CBDCs): A Comparative Review, A REPORT PREPARED FOR
CPA AUSTRALIA BY RMIT UNIVERSITY, 5 (2021).
64
Zetzsche, et al., UNIVERSITY OF HONG KONG FACULTY OF LAW RESEARCH PAPER NO. 2020/053, 6 (2020).
65
James Kynge & Sun Yu, Virtual Control: The Agenda behind China’s New Digital Currency(2021), available at
https://www.ft.com/content/7511809e-827e-4526-81ad-ae83f405f623.
66
Karen Yeung, China Not Among Major Central Banks in Talks on Global Digital Currency Principles, South
China Morning Post(2020), available at https://www.scmp.com/economy/china-
economy/article/3104905/china-not-among-major-central-banks-talks-global-
digital?utm_medium=email&utm_source=mailchimp&utm_campaign=enlz-
scmp_china&utm_content=20201009&tpcc=enlz-
scmp_china&MCUID=b2992489b1&MCCampaignID=c2e928c32f&MCAccountID=3775521f5f542047246d9c82
7&tc=5.
67
People's Bank of China, Law of the People’s Bank of China (Amendment Draft for Consultation) Article 22
(2020).
68
ESWAR S. PRASAD, THE FUTURE OF MONEY: HOW THE DIGITAL REVOLUTION IS TRANSFORMING CURRENCIES AND FINANCE 254
(Belknap Press. 2021).
69
People's Bank of China, Explanation for the Law of the People’s Bank of China (Amendment Draft for
Consultation)(2020), available at
http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/4115077/index.html;People's Bank of China, Law of
the People’s Bank of China (Amendment Draft for Consultation) Article 19. 2020.
70
Eleanor Olcott & Eva Szalay, China Expands Crackdown by Declaring All Crypto Activities ‘Illegal’(2021),
available at https://www.ft.com/content/31f7edf7-8e05-46e1-8b13-061532f8db5f.
71
Weimiao Cheng, What Is the Difference Between China’s DC/Ep and g7 Central Bank Digital Currency? Zhou
Xiaochuan Said This(2020), available at http://www.bjnews.com.cn/finance/2020/10/28/782205.html.
72
Ping Xie, Ping Xie: After CBDC Infrastructure Is Developed, It Could Break Third-Party Payment
Monopoly(2020), available at https://mp.weixin.qq.com/s/uHQs0mIPEZQIe8R5xz6vfA.
8
cash, retail CBDCs represent “a more revolutionary change” than wholesale CBDCs.
73
Wholesale CBDCs are often “restricted-access digital token[s] for wholesale settlements like
interbank payments.
74
Retail CBDCs are digital fiat monies that are widely accessible and
available to the public, and “would be a central bank liability and form part of the base
money supply.
75
That said, China appears to “explor[e] both wholesale and retail CBDC”.
76
Other differences, including data regulation and how e-CNY will be driven by the promotion
of RMB internationalisation,
77
remain to be seen.
3.2 The implications for businesses
E-CNY may profoundly affect business, product offerings and business practices in
commerce related to China. If China’s CBDC practice and standards affect international
practice (such as through standard making), they may affect other businesses in the long
run. In the short term, CBDC is likely to affect wide-ranging international businesses,
particularly those with a presence in China or those who commonly transact with Chinese
actors. The legal tender status of e-CNY means that the acceptance of e-CNY is eventually to
be mandatory in China.
78
If everything goes smoothly, e-CNY will likely be “the cash of the
future” in China.
79
E-CNY’s standing as a legal tender will impact financial and technology
sectors (e.g. telecommunication companies and commercial banks that design related
products and services), ordinary businesses in other sectors, and the public that use fiat
currency. The visibility on the use of money will be a new scenario faced by businesses and
other stakeholders.
Businesses such as banks could face various issues including:
(i) the interaction between e-CNY and bank accounts and mobile payment services;
(ii) possible cross-border payment by individuals and firms using e-CNY;
(iii) compliance issues (e.g. anti-money laundering and counter-terrorism financing
controls, consumer protection and disclosure, data privacy, licensing and
prudential conduct, interoperability with other currencies and systems), and
relatedly the division of tasks between onshore and offshore entities; and
(iv) cash management and foreign exchange strategies.
80
Businesses may also face other CBDC-related issues, including financial inclusion.
81
Businesses that may engage with e-CNY (e.g. receiving payment in e-CNY) are advised to
understand the implications of CBDC and take measures to manage its implementation.
Involving many of their teams (e.g. management and digital asset teams), businesses need
to explore CBDC’s possible impact on their businesses and plan a strategy to build the
73
PRASAD, 12. 2021.
74
Yang Ji & Yan Shen, Introduction to the Special Issue on Digital Currency, CHINA ECONOMIC JOURNAL 1, 1-2
(2021).
75
Kiff, et al., IMF WORKING PAPER NO. 20/104, 7 (2020).
76
Silva, et al., A REPORT PREPARED FOR CPA AUSTRALIA BY RMIT UNIVERSITY, 5 (2021).
77
Yeung, China Not Among Major Central Banks in Talks on Global Digital Currency Principles. 2020.
78
Olsson, et al. 2021.
79
Mookerjee. 2021.
80
Olsson, et al. 2021.
81
Xie. 2020.
9
capacity to perform business operations in the new landscape and manage risks (e.g. friction
in CBDC transactions).
82
First, it is crucial to assess possible regulatory changes ranging from transaction data to
the possible monetary, tax and other regulatory measures of e-CNY (such as those on the
use of e-CNY). Businesses operating in China would need to “monitor any arising risks”,
understand how financial products “fit within the new DCEP ecosystem”, adapt their China-
related operations to support DCEP, and “adjust reporting requirements and financial
reserves required due to DCEP use”.
83
Administrative rules on e-CNY, along with “the
rulebook and technical codes”, will be introduced or developed.
84
Separate regulatory
measures and rules for e-CNY are likely to be adopted.
85
A new regulatory framework may
emerge to addresses various aspects of e-CNY, including its circulation and use.
Second, it is important to understand any CBDC-related changes in business practice. E-
CNY may lead to a new economic ecosystem (e.g. financial instruments denominated in e-
CNY) that goes beyond a new “currency infrastructure”.
86
For instance, there would likely be
competition for distributing electronic wallets featuring user-friendly and innovative
solutions.
87
E-CNY’s introduction means that financial and non-financial businesses will face
pressures to provide more digital payment choices and enhanced customer experiences.
88
As banks are not permitted to charge users for settling e-CNY transactions, this could
“pressure third-party platforms to provide more favorable terms for users”.
89
The list is only
likely to grow. Through new technologies and applications, e-CNY may be connected with
artificial intelligence, big data, cloud computing, and the internet of things.
90
Third, the regulatory and business changes surrounding CBDC could further lead to
changes in both “hardware” and “software”. For an example of “hardware”, businesses like
retail banks, merchants, and payment service providers, may need to assess the level of
needed infrastructure investment to work with CBDC.
91
The acceptance systems of the
merchants need to be transformed and upgraded for the use of e-CNY.
92
CBDC could
“render much of the physical infrastructure of banking redundant” with the move towards
increased digitalisation of the ecosystem.
93
As an example of “software”, it is argued that
82
PWC, The Rise of Central Bank Digital Currencies (CBDCs): What You Need to Know(2019), available at
https://www.pwc.com/gx/en/financial-services/pdf/the-rise-of-central-bank-digital-currencies.pdf;Chow &
Eckert. 2021.
83
Betty Louie & Martha Wang, China’s Digital Currency and What This Could Mean For Foreign Companies and
Financial Institutions in China(2021), available at https://www.jdsupra.com/legalnews/china-s-digital-
currency-and-what-this-7987963/.
84
Working Group on E-CNY Research and Development of the People's Bank of China, 14 (2021).
85
Sina.com.cn, Mu Changchun: Three Major Challenges Facing the Official Launch of the Digital RMB(2021),
available at https://finance.sina.com.cn/blockchain/roll/2021-11-04/doc-iktzqtyu5313884.shtml.
86
Olsson, et al. 2021.
87
Mookerjee. 2021.
88
Chow & Eckert. 2021.
89
Boland, DENTONS FLASHPOINT, 17 (2021).
90
Olsson, et al. 2021.
91
Ian De Bode & Matt HigginsonMarc Niederkorn, CBDC and Stablecoins: Early Coexistence on an Uncertain
Road, (2021).
92
Sina.com.cn. 2021.
93
Mookerjee. 2021.
10
contracts with third-party financial custodians may be considered by businesses to
accommodate e-CNY (e.g. digital wallets).
94
Finally, CBDC will bring both opportunities and risks. CBDC may bring opportunities,
depending on the situation of specific businesses. As an example, banks may leverage e-CNY
digital wallets to “cross-sell other high-margin services”.
95
As a digital currency carrying
transaction information, CBDC could bring opportunities for innovative financial offerings
and, relatedly, increasing investor demand for these innovative products.
96
Substantially
changing Chinas digital payment market, e-CNY “offers an entry point for Chinas big banks
to break into a business segment that is currently dominated by big tech firms”.
97
CBDC-related risks, including operational and financial risks,
98
may arise from the systems
that CBDC involves, ranging from payment to e-commerce. For instance, risks may arise
from financing, currency and payment operations
99
that connect to “existing and newly
developing payment systems and currencies”.
100
E-CNY’s simulation of ordinary banking
activities, ranging from payments and deposits to withdrawals from a digital wallet,
101
may
require businesses to consider internal controls for data protection and cybersecurity.
102
3.3 The implications for international business
At the very least, China’s CBDC may be used internationally in broad contexts like trade.
E-CNY’s possible use for cross-border payments may “support China’s efforts to have the
RMB used more widely for pricing and settlement of trade transactions, the financing of
projects around the region” and become an international reserve currency.
103
Meanwhile,
the time and expenses involved in international settlement seem to be more due to the
gatekeeping capacities of banks and regulatory requirements of different countries, rather
than specific technological issues.
104
Therefore, the operation and effects of the possible
international use of e-CNY are yet to be seen.
Various issues deserve the attention of international businesses that may be affected by
the introduction of CBDC. First, businesses are likely to “explore interoperability options
when conducting cross-border trade” if e-CNY “leads to an alternative international
payments system vis-à-vis the current US-led system”.
105
Second, multinational enterprises
may face different regulatory requirements across jurisdictions in cross-border transactions.
There is likely to be differences regarding the treatment of privacy (e.g. central banks’
access to “granular transaction data on individuals”) among China and other economies like
the US.
106
Third, e-CNY direct payments between parties from different states could reduce
the demand for correspondent banking services and SWIFT financial messaging and
94
Jemma Xu & Dan Prud’homme, China’s Digital Currency Revolution and Implications for International
Business Strategy, 2 (2020).
95
Sundeep Gantori, et al., Information Technology: Understanding China's Digital Currency and Blockchain
Initiatives, 10 (2020).
96
Chow & Eckert. 2021.
97
Deutsche Bank Research. 2021.
98
Xie. 2020.
99
Chow & Eckert. 2021.
100
Bharathan. 2021.
101
Yeung & Mullen. 2021.
102
Louie & Wang. 2021.
103
Olsson, et al. 2021.
104
Jiang & Lucero, 17 (2021).
105
Xu & Prud’homme, 3 (2020).
106
Martin Chorzempa, China, the United States, and Central Bank Digital Currencies: How Important Is It to Be
First?, CHINA ECONOMIC JOURNAL 1, 5 (2021).
11
payment systems.
107
That said, a joint venture between SWIFT, the global financial
messaging system, and China’s department responsible for e-CNY is exploring the
international use of e-CNY.
108
Last and more broadly, businesses need to consider questions
like the implications for supply chains if more transactions are denominated in digital
currencies.
109
Observers also indicate that “the web of individual transactions via DCEP
could evolve greater B2B usage with broader operating implications”.
110
However, these
issues are not exhaustive, and challenges for businesses will continue to evolve.
4. Conclusion
With the increased digitisation of transactions, businesses and other stakeholders need
to explore regulatory (including those concerning privacy), data, security and other
implications arising from CBDC.
111
The confidence of users in CBDC and its regulation will be
crucial. Many questions deserve further attention. For instance, are there first-mover
advantages or last-mover advantages for businesses?
E-CNY is both a moving and unique target, affecting “hardware” and “software”. By
considering the some of the implications of e-CNY explored in this article, businesses can
begin to adequately prepare for a landscape changed by e-CNY and emerging CBDCs.
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Article
In only a few years, central bank digital currencies (CBDC) have gone from a fringe idea promoted by cryptocurrency bloggers to an idea being seriously explored by 80% of the world’s major central banks, including the People’s Bank of China and the United States Federal Reserve. This paper gives an overview of the drive at the world’s central banks to evaluate CBDCs and examines the reasons behind the world’s two leading economies’ stark divergence in central bank digital currency development. China committed much earlier to launching a CBDC, doing so in early 2016, and has since taken more concrete steps towards piloting and issuing a CBDC than the Fed, which has yet to commit to ever issuing one.
Article
In contrast with the selective adaptation approach toward external norms seen in its accession to the World Trade Organization, China increasingly plays a proactive role on the international stage, with the Belt and Road Initiative at the center of these activities. How can we understand this new approach by China toward international economic governance? What is responsible for China’s shifting approach, and what are the implications of this shift? The paper presents selective reshaping as a new theoretical framework, and argues that China is shifting toward the selective reshaping of institutions and rules within the global economic order. Within this theoretical framework, perception and conception, complementarity and legitimacy are influencing components that affect selective reshaping, and which manifest substantially differently in this context, when compared with selective adaptation. Selective reshaping is likely to transform the institutions and rules within the international economic order, and carry long-term implications.
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Yanting Wu, Why Does the Digital RMB Accelerate?, OUTLOOK WEEKLY (2021).
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China's Digital RMB -Is Your Business Ready?
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