China To Allow Fee To Prevent CBDC Bank Runs

February 17, 2022
Mu Changchun, the People’s Bank of China’s digital currency lead, has given more hints to the world about how the most significant central bank digital currency (CBDC) project in a major economy is evolving.

Mu Changchun, the People’s Bank of China’s (PBOC) digital currency lead, has given more hints to the world about how the most significant central bank digital currency (CBDC) project in a major economy is evolving.

Friction may be added to large e-CNY transfers, while banks may charge fees for large or frequent transfers of deposits to e-CNY, Changchun said in a sign of how the country’s CBDC may look once it moves out of its pilot phase.

This will be able to prevent arbitrage and the crowding out of deposits under stress, according to Changchun, while discussing the plan to prevent disintermediation and/or bank runs from taking place.

This follows the news last year that China's new digital wallet will include a no transaction cap version, meaning that both wholesale and retail payments could be possible via the digital currency.

The country is currently in the process of delivering the Winter Olympics and, according to press reports, the e-CNY has made an appearance at the event.

Visitors to the 2022 Beijing Games have been able to download a digital yuan wallet app or store the digital money on a physical card.

They can additionally get hold of wristbands that can be swiped to make transactions.

However, this is not any normal Winter Olympics considering the impact of the pandemic, as well as diplomatic protests taking place against the country. But it has provided the East Asian state with the opportunity to showcase its innovation.

China began rolling out its digital currency in pilot zones in April 2020 in the cities of Shenzhen, Suzhou, Chengdu and Xiong'an. Since, usage has also been made possible in Shanghai, Hainan, Changsha, Xi'an, Qingdao and Dalian.

As of early January, the CBDC has been made accessible on iOS and Android app stores.

According to officials, more than 140m users have now registered for e-CNY accounts and, as of November, the digital currency had reportedly processed $9.7bn worth of transactions.

Changchun used the speech to the Atlantic Council, a US-based think tank, to demonstrate why China feels its e-CNY is necessary for the world’s largest population and second-largest economy.

China’s motivations for the digital yuan are centred around improving the efficiency of the country’s payment system, including extending bank service hours to 24/7 for the public, settlement of bond payments, and engaging new participants for innovation such as third-party providers, fintechs and telecommunications companies.

Another ambition is to offer a back-up to mass market payment systems in the country, particularly the dominant WeChat Pay and Alipay.

The two platforms are deemed by Changchun as “significantly important financial infrastructure” in China, with significant impact if they have a failure.

For example, WeChat has more than 1.2bn monthly active users, and 78 percent of people in China aged between 16 and 64 are using the super app.

According to a survey in 2018, around 98 percent of people in China's largest cities use WeChat Pay or Alipay as their main means of payment.

The digital yuan can also aid financial inclusion. Around 10 to 20 percent of the population in rural areas do not have a traditional bank account, and Changchun confirmed that tourists are also considered a part of the inclusion efforts.

“The e-CNY will make financial services more accessible, providing fiat currency to large parts of the population in various scenarios, especially people in remote and poorer areas,” he said.

Meanwhile, the PBOC official confirmed that there will be anonymity. e-CNY needs to be purchased with a mobile number, yet Changchun pointed out in the speech that the country’s data protection laws mean that telecommunications companies will not be allowed to provide personal details that could reveal an individual’s identity to the PBOC.

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