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As the Yuan’s Digital Hype Fades, China Must Find New Institutional Use Cases

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China’s e-CNY, the digital yuan, once attracted global attention as central banks, journalists and politicians closely monitored its implications. The People’s Bank of China (PBOC) launched a pilot app in January 2022, featuring the world’s most advanced Central Bank Digital Currency (CBDC). However, the initial hype surrounding e-CNY has diminished significantly.

According to Richard Turrin, a Shanghai-based fintech consultancy, the PBOC is now focused on the “dirty, hard work” to build a reliable and ubiquitous national digital currency. Unlike launching a cryptocurrency, creating e-CNY requires thorough testing and ensuring seamless functionality for each user. Youwei Yang, chief economist of Bit Mining, highlighted the challenges facing e-CNY, including issues of privacy, user habits and interoperability with existing payment systems such as Alipay and WeChat Pay.

Despite the waning hype, the PBOC has expanded its digital yuan trial to 26 locations in 17 provincial-level cities and counties. Matteo Giovannini, senior finance manager at ICBC, China’s largest state-owned commercial bank, noted that e-CNY remains the world’s largest CBDC pilot in terms of currency in circulation and user base.

To regain momentum, the PBOC is shifting its focus to business-to-business promotion, which aims to force more retailers to accept the digital currency. Recently, DBS Bank became one of the first foreign banks to launch the e-CNY initiative, which enables corporate clients to accept payments in digital yuan. This move is seen as an important milestone demonstrating the added value of e-CNY in the banking sector.

While integration with large institutions may promote wider adoption, it is still uncertain whether offshore entities will use e-CNY for settlements widely, especially given geopolitical tensions. Western financial institutions face challenges when engaging in partnerships promoting the Chinese yuan while efforts towards de-dollarization are being made in various countries.

Despite the dominance of Alipay and WeChat Pay, which have integrated e-CNY into their services, increasing daily use of digital currencies remains a challenge. To address this, authorities in Shenzhen have started testing prepaid consumption using e-CNY, and the Bank of China is exploring new offline payment methods tied to SIM cards.

However, e-CNY still has limitations such as the absence of deposit and interest guarantees. Addressing this challenge requires expanding use cases that incentivize users to spend e-CNY and encourage merchants to accept it.

In conclusion, while the initial hype surrounding China’s e-CNY has faded, PBOC is continuing its efforts to build a reliable and widely adopted digital currency. Addressing challenges such as privacy and interoperability issues will be critical to e-CNY’s future success. With a shift towards business-to-business promotions and strategic partnerships, digital yuan aims to expand its reach and gain traction among retailers and consumers.

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