According to Moody’s, China’s central bank digital currency (CBDC), the “digital yuan,” will give banks an advantage after losing ground to fintech platforms in the payments sector.
“We expect e-CNY adoption to help reinforce banks’ position in the payments system because it will improve data collection ability and broaden their user bases,” analysts led by Zedric Cheung reported.
China’s leadership in CBDC development is consistent with their advanced digital payment culture. China has already become a largely cashless society as a result of the widespread popularity of digital payment tools operated by Tencent and Ant Group. Their market power has impacted traditional banks’ operations, as more customers transfer deposits to money market funds managed by fintech firms.
The People’s Bank of China (PBOC) has created a two-tier structure for digital yuan, which is currently being tested in a dozen Chinese cities. To begin, similar to fiat currency, the central bank issues digital currency to authorized commercial banks. The digital yuan, also known as the e-CNY, is then exchanged and circulated to the public by these authorized commercial banks. China Merchants Bank Co. Ltd., for example, has become the latest official distributor, joining six state-owned banks and virtual banks backed by Ant and Tencent.
Blockchain backed by the government
The development of the digital yuan, according to Moody’s analysts, “reflects the authorities’ concerns about data concentration among technology companies.” The PBOC believes that e-CNY provides improved privacy protection and the ability to combat crime.
This apprehension about private technology firms has also contributed to the Chinese government’s crackdown on cryptocurrency trading and mining. Despite its reservations about privately issued cryptocurrencies, China aspires to be the most advanced global blockchain power by 2025. One way it hopes to accomplish this is by integrating it into key industries, such as payments.
For example, after prohibiting financial institutions from dealing with crypto-based companies, the PBOC reiterated this to Alipay and a few other select companies. However, Alipay’s parent company, Alibaba, is now offering NFTs on its online auction platform, with the support of the Sichuan provincial government. Companies appear to be able to provide crypto-related services as long as they advance the state’s goals.