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Effects of e-CNY, the new Chinese cryptocurrency

Posted on 6 July 2021
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Effects of e-CNY, the new Chinese cryptocurrency

The use of cryptocurrencies has exploded in recent times, from Bitcoin to Ethereum there is today a fairly wide range of options of these types of currencies, which it has been speculated, may bring major changes to the use and ownership of money. The cryptocurrency that has attracted a significant amount of attention is the new electronic Chinese yuan (e-CNY), which was launched as a pilot program in the cities of Shenzhen, Suzhou and Chengdu, as well as the Xiong’an New Area near Beijing in April 2020. This level of attention is mainly due to the fact that other cryptocurrencies like Bitcoin are outside the traditional global financial system and thus, they are not legal tender like cash issued by governments, however the e-CNY, as it issued by the People’s Bank of China (PBOC), which is China’s central bank, it is legal tender, therefore it is a major-step in the use of cryptocurrency (Areddy, 2021; Broby, 2021). The e-CNY may spark some major geopolitical consequences, for instance Bitfool, an anonymous Chinese cryptocurrency observer, argued that “the Chinese government believes that if some other countries can also use the Chinese currency, it can break the United States’ monetary sovereignty. The United States has built the current global financial system and the instruments” (Vincent, 2020).

In order to understand the consequences that the e-CNY may have, one has to understand first what exactly it is and how it really works. As mentioned before, the e-CNY is a legal tender cryptocurrency, in other words, it is a currency issued by the PBOC and therefore, all entities in China must accept it. They are worth the same as a yuan in paper currency and both will be exchangeable with one another. Users will be able to store e-CNY in an “e-wallet” app on their mobile phone and shortly they will have the possibility of purchasing e-CNY in China’s six large state-owned banks and also the bank affiliates of Tencent and Ant Group, which already have the control over the two major digital retail payment platforms in China (Greene, 2021; Tayeb, 2021). This will boost the number of cashless payments done in China, which is already at a very high rate, as China is the world-leader in electronic payments, for instance in 2020, around 58% of the Chinese population used mobile payments, which has been a very stark increase, from 2016 when it was only 33%. What is more, around two-thirds of all personal consumption PBOC payments, where done through mobile payments, Yan Xiao, project lead for digital trade at the World Economic Forum pointed out referring to e-CNY that “the use of cash is decreasing. Eventually cash will be replaced by something in digital format. That is one of the big drivers behind this,”. Therefore, it is very clear that the use of QR codes on smartphones as a form of payment is quite established in China, for instance Ant Group, which is the financial subsidiary of Alibaba was positioned to become one of the world’s biggest financial companies in 2020 (Ferguson, 2021; Kharpal, 2021).

Regarding how the new electronic Chinese yuan operates, it has two major tiers, the first one, known as the lower tier, is, at least for this moment, composed by a few commercial banks that seek to ensure the exchange of e-CNY with cash or bank deposits. On the other hand, the upper tier is the PBOC, which governs the whole supply of e-CNY, and also regulates the payments that are done among the lower-tier banks with e-CNY. The chief economist of the China Banking Association has used the concept of “one coin, two databases, three centers” to describe the e-CNY network. The “One coin” refers to the e-CNY unit of currency, the “two databases” refer to, on the one hand the central bank’s ledger, which is responsible for auditing all e-CNY outstanding and on the other hand, all the e-CNY ledgers, which seek to manage the network of lower-tier banks. Finally, the “three centers” refer to different PBOC entities, the certification centre, the registration centre and the big data analysis centre (Greene, 2021). How the e-CNY has been developed, will enable the Chinese government to have an even higher degree of control over their population, as they will be able to have a bigger amount of information on their spending, which will give the Chinese government more tools to go against dissidents, Yaya Fanusie, a fellow at the Center for a New American Security, a think tank, and an author of a recent paper on the Chinese currency, clearly argued that these move was “about more than just money,” “it’s about developing new tools to collect data and leverage that data so that the Chinese economy is more intelligent and based on real-time information” (Popper and Li, 2021).

The new electronic Chinese yuan is expected to spark some major geopolitical consequences. Nonetheless, none of them is probably as important as the new capabilities that it will give the Chinese government to challenge the dominance of the US dollar in cross-border payments. Currently, the dollar is the dominant currency in foreign exchange markets, central bank reserves, trade finance and bank-to-bank payments, through the SWIFT international banking protocol. This position of power gives the US several advantages, for instance it gives the US government the possibility to borrow cheaply (Broby, 2021; Matthews, 2021). Nonetheless, the Chinese government has already been trying to challenge this position, as for instance they have established the Finance Gateway Information Service, which is a joint attempt between the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and the China National Clearing Center within the PBOC, that will seek to direct all cross-border payments done with Chinese currency through a Chinese settlement system, the Cross-Border Interbank Payment and Clearing. Not only that, but there are also pilots of cross-border transfers between Hong Kong and Shenzhen. Experts have warned against the possible consequences of these actions, Sahil Mahtani of the South African investment manager Ninety One, argued that the main objective of this Chinese policy is “to create a parallel pay­ments network — one beyond American oversight — thereby crippling U.S. sanctions policy” (Ferguson, 2021). In addition, Josh Lipsky, a former International Monetary Fund staffer, who now works at the Atlantic Council pointed out that “anything that threatens the dollar is a national-security issue. This threatens the dollar over the long term.” (Areddy, 2021).

The most important consequence of the US losing its position of dominance over cross-border payments would be that US sanctions would be far less effective than what they currently are, this is due to the fact that the e-CNY would enable firms based in China to use it in transactions with people, businesses, and entities, which are being subject to US sanctions. US sanctions try to block sanctioned parties from accessing any services, which are supplied by firms needing access to US dollars, thus, significantly diminishing the ability of a sanctioned party from taking part in the global economy, for this reason, the e-CNY, could be a severe blow to US national security, as it would give these parties a useful tool for avoiding these sanctions (Greene, 2021). This is perfectly showcased by the words of Nicholas Burns, long-time American diplomat and favourite to be ambassador in Beijing as he pointed out that “the Chinese have created a problem for us by taking away our sanctions leverage.” The Chinese government has a special interest in downgrading the capabilities of US sanctions, as there are over 250 Chinese names, some of which are politicians, who the US have accused of crimes against ethnic minorities and also of slashing freedoms in Hong Kong, who would benefit from this new Chinese cryptocurrency to avoid the effects of these sanctions (Areddy, 2021).

An article in China Finance, which is the magazine of the central bank, clearly stated that “the right to issue and control digital currencies will become a ‘new battlefield’ of competition between sovereign states” (Popper and Li, 2021). The Chinese government has been able to position itself at the forefront of this new area, which could have very negative consequences not only for the international system, as it has already been mentioned but also for the Chinese population, particularly due to the fact that it will provide the Chinese government with yet another tool to monitor and go against dissidents, human rights activists, and even persecuted groups such as Uyghurs (Allen-Ebrahimian, 2021). Therefore, it is imperative that the International Community, and especially US policymakers realise the huge importance that digital currency and electronic payments will have in the near future and offer an alternative option to the Chinese model (Ferguson, 2021).

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By Mahmoud Refaat: The European Institute for International Law and International Relations.

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