Digital Yuan Troubles: Is China’s e-Currency Fated to Flop?

China's aspiring plan for a central bank digital currency (CBDC), the e-CNY or digital yuan, is facing significant challenges in adoption.

Despite the government's reports of billions in transactions and enthusiastic city trials, the reality is more complex.

A closer examination reveals a lukewarm reception from the intended users.

The digital yuan is struggling to gain traction in a trial where state employees are paid in the CBDC, highlighting the gap between government expectations and actual user acceptance.

Early Adopters Shun e-CNY, Cite Functional Limitations, Lack of Privacy & More

After receiving their salaries in digital yuan, most early recipients quickly transfer their balances to their bank accounts to convert the digital currency into fiat.

This behaviour indicates a strong preference for physical cash over the digital alternative.

Despite the Chinese government's efforts to promote the digital yuan, many workers remain hesitant to use it in their daily transactions.

Reasons for this reluctance include functional limitations, a lack of incentives, and concerns over privacy and security.

Sammy Lin, an account manager at a state-owned bank in eastern China's Suzhou and one of the participants in the pilot programme that began with employees of government bodies and state-owned companies, explained:

“I prefer not to keep the money in the e-CNY app, because there’s no interest if I leave it there. There are also not so many places, online or offline, where I can use the e-yuan.”

Also, unlike established digital payment platforms such as Alipay and WeChat Pay, which dominate everyday life, the e-CNY lacks widespread merchant adoption both online and offline.

Despite China being a "functionally cashless" society for over a decade, many Chinese citizens remain wary of digital currencies like the digital yuan.

Concerns over monitoring and privacy have made them reluctant to embrace this new form of currency.

The integration of blockchain technology into the digital yuan raises significant privacy concerns, as it implies that all transactions are potentially traceable.

A researcher at the Cheung Kong Graduate School of Business in Beijing, Ye Dongyan, emphasized the challenge of balancing privacy and security, which has hindered the promotion of the digital yuan.

He added:

“Paper currency is used anonymously, but the digital yuan is different. The boundaries between information tracking and information security protection need more deliberation.”

On the other hand, Andrew Wang, a civil servant, mentioned that he is not particularly concerned about digital cash since only a small portion of his salary is paid in digital yuan.

However, his wife, who receives her entire salary in digital yuan, immediately converts it to regular cash due to its limited utility.

He explained that she cannot deposit the funds or purchase financial products with the e-CNY wallet, making cash a more practical option.

Wang remarked, noting its lack of competitiveness against Alipay and WeChat Pay, both widely utilised and offering numerous additional features:

"The disadvantages are obvious as it is not accepted in all shops, and serves merely as a payment tool."

An unnamed Beijing-based economist concurred, emphasizing that the widespread usage of sophisticated online payment applications poses a significant barrier to the widespread adoption of the digital yuan.

He stated:

“The development of online payment tools has been so fast and fierce that they can't possibly be replaced by a new thing, unless it's a disruptive innovation.”

Scepticism Persists Despite Government's Assurance

Despite government claims that the e-CNY prioritises privacy through "controllable anonymity," questions linger regarding its efficacy in assuaging citizen anxieties.

Yi Gang, the former governor of the People's Bank of China (PBOC), with regard to privacy issues, called it "the biggest challenge of the digital finance era," despite asserting at a March forum in Beijing that this system safeguards small transactions while monitoring larger ones to combat financial crimes.

Mu Changchun, director of the Digital Currency Research Institute under the PBOC, emphasizes that users can easily obtain a wallet for small-value transactions using only a mobile phone number.

He underscores that telecom operators are prohibited by existing laws and regulations from disclosing the identity associated with the number to third parties, a stance he has reiterated consistently over the past few years.

However, Mu emphasizes that large-value transactions must occur within identified wallets to enable traceability.

This measure, he contends, is essential for curbing criminal activities such as money laundering and terrorism financing.

Arrest of Key Figure Behind e-CNY in Corruption Probe

Yao Qian, the driving force behind China's CBDC initiative, is reportedly facing scrutiny for suspected "violations of discipline and law."

Renowned for his pivotal role in spearheading CBDC research at the PBOC and previously serving as the director of the Science and Technology Supervision Bureau at the China Securities Regulatory Commission, Qian has long been a prominent figure in China's blockchain community.

Affectionately dubbed "Crypto Dad," he served as the inaugural director of China's CBDC research department at PBoC from 2017 to 2018.

His leadership in the development and implementation of the digital yuan has influenced global discussions on CBDC adoption.

While the Central Committee of the Communist Party of China has initiated an investigation into Qian for alleged "serious violations" of discipline and law, specific details surrounding the matter remain undisclosed.

Digital Yuan Transactions Soar, Records $250 Billion

China initiated trials of the digital yuan in select cities back in 2019, aiming for a nationwide rollout amidst intense global competition to introduce a state-backed digital currency.

Despite the absence of a specified timeline for the national launch, the country has been actively advocating for the currency since the inception of the trials.

The figure below shows the timeline of the development of China's CBDC.

Source: The World Economic Forum's "Central Bank Digital Currency Global Interoperability Principles" White Paper (June 2023)

Yi Gang revealed that digital yuan transactions have surged past $250 billion as of 20 July 2023.

However, amidst this milestone, concerns persist regarding privacy implications.

Unlike traditional cash transactions, which offer anonymity, digital yuan transactions are traceable, granting authorities extensive insight into individuals' financial dealings.

This lack of privacy has sparked worries about surveillance and potential misuse of personal financial information.

Addressing these concerns, a leading Chinese law firm has analysed the anti-money laundering (AML) complexities associated with the digital yuan, particularly its cross-border transaction nature, which challenges conventional AML monitoring methods.

Meanwhile, the Industrial and Commercial Bank of China's annual report indicates significant digital yuan wallet growth, with over 15 million new individual wallets and 1.3 million created by businesses in 2023.

Additionally, more than 2.7 million businesses now accept the digital currency.

In Suzhou, China, over 29.16 million digital yuan wallets were opened in February alone, with transactions exceeding $416 billion last year.

While the digital yuan is increasingly integrated into public services such as tax and social security payments, the driving force behind its adoption remains uncertain.

Is it a natural evolution or a result of government-led initiatives?

Other Countries Exploring Development of CBDC

Nearly all developed countries are actively exploring the development of CBDCs as a digital complement to cash.

And China's digital yuan represents the largest CBDC pilot globally, reaching 260 million wallets across 25 cities.

Since 2022, it has been used in various settings, from transit and healthcare to purchasing crude oil.

In 2024, the focus is on optimising its use for overseas tourists and expanding cross-border applications of the e-CNY.

CBDCs present significant opportunities for financial inclusion, yet there are critical concerns that need to be addressed, according to the World Economic Forum’s Digital Currency Governance Consortium White Paper Series.

The figure below shows the exponential growth in CBDC exploration.

Source: The World Economic Forum's "Central Bank Digital Currency Global Interoperability Principles" White Paper (June 2023)

The figure below shows the map of CBDC phase of exploration.

Source: The World Economic Forum's "Central Bank Digital Currency Global Interoperability Principles" White Paper (June 2023)

According to the Atlantic Council's CBDC Tracker as of March 2024, 134 countries and currency unions, representing 98% of global GDP, are exploring a CBDC.

Source: Atlantic Council's CBDC Tracker

In May 2020, only 35 countries were exploring CBDCs.

Today, that number has nearly doubled, with 68 countries in the advanced phases of development, pilot, or launch.

Among the Group of 20 (G20) nations, 19 are actively progressing in their CBDC initiatives, with 11 already in the pilot stage, including Brazil, Japan, India, Australia, South Korea, South Africa, Russia, and Turkey.

Three countries have fully launched a CBDC: the Bahamas, Jamaica, and Nigeria.

The Eastern Caribbean Currency Union, comprising eight countries, had to halt its DCash due to technical issues and is now developing a new pilot.

Bleak Outlook for Digital Yuan

The future of the e-CNY remains uncertain.

Despite the government's efforts to promote wider adoption, user behaviour indicates that financial incentives alone are insufficient.

To achieve widespread acceptance, it is crucial to address the limited use cases and build trust around privacy protection.

Although China's digital currency project has the potential for broader adoption, it currently appears to be caught in a cycle of conversion from digital yuan back to cash.