Today the South China Morning Post (SCMP) published an article entitled, “China is paying some workers in digital yuan – but few are choosing to use it”. At first we thought it might be an audacious article. That’s because SCMP is owned by Alibaba which, along with sister company Ant, has been the target of a regulatory clampdown by the Chinese government. However, the main gist of the piece is that employees receiving salaries in the central bank digital currency (CBDC) are transferring it out of the eCNY because it doesn’t pay interest. In our view, that is a feature not a bug.
After all, most CBDCs are intended for payments, not as deposit instruments.
However, a secondary driver for converting the salary from the eCNY, is that few retail outlets accept the CBDC. That’s a more serious issue because network effects require sufficient retail outlets to support it. As with all jurisdictions with good existing payment infrastructure, it’s hard for users to justify using an alternative.
However, given that Chinese retailers pay zero acceptance fees on the CBDC, you’d think there would be more outlets. On the one hand, acceptance fees are relatively low in China – around 0.6%. However, point-of-sale equipment manufacturers reportedly earn a cut of merchant fees. So if CBDC fees are zero, they are disincentivized to convert their equipment because they lose fees from alternative payment methods, as we wrote last year.
The person who expressed their reluctance to keep the eCNY to the SCMP, Sammy Lin, added “Though I myself don’t worry much about privacy – online payment is so common that I rarely use cash now – I understand there are people who are concerned about this.” China claims small value payments can be anonymous, but not medium or large ones. However, small value wallets still need to provide a phone number. In that scenario, the authorities need a warrant to identify the user.
The digital yuan pilots progress
Meanwhile, the eCNY is becoming deeply integrated with Huawei’s phone and IoT devices. Plus, the central bank recently published an English CBDC guide for tourists.
