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Beijing Digital Yuan May Have Its Huawei Moment

Digital yuan, the currency which is being trialed in several cities in China, is due to be formally launched before China holds the Winter Olympics next year is intended to achieve several goals.

Beijing’s planned launch of a digital yuan is a case in point. It “borrows” a technological breakthrough to lay the foundation for China’s party-state to reassert control over powerful private sector actors.

Most obviously, it promises to usher in a fully digital payments system in the world’s second-largest economy. Christine Lagarde, president of the European Central Bank, has said China is leading other large economies in preparing to embrace a digital monetary future.

The digital yuan also has the potential to bring to heel Alibaba’s Alipay and Tencent’s WeChat Pay, two private sector services that together account for more than 90% of electronic payments currently made in China.

The threat to Alipay and WeChat is clear from the way the digital yuan which is controlled by the central bank functions. The e-yuan can be used independently of the two platforms; users simply set up digital yuan accounts, or digital wallets at banks where they hold deposits.

They then install these wallets on their smartphones, allowing them to make payments by putting their smartphones close to the point of sale or to other smartphones. No internet connection is required for these payments, creating a frictionless system that is able to circumvent Alipay and WeChat Pay.

A Chinese financial industry executive who declined to be identified has a prediction. “The digital renminbi is a clear rival to Alipay and WeChat Pay,” he said. “The state sees the official digital renminbi as a tool to boost administrative power, and it does not want to share this power with technology companies like Alibaba and Tencent.

The potential to sideline Alipay and WeChat Pay is not the only way in which the advent of a digital renminbi promises to shore up China’s party-state.

The digital yuan also boosts the potential for surveillance. Much of China’s current digital transaction data is held by Alibaba and Tencent. But the popularization of an official digital currency would, at least in theory, make a wealth of commercial data available to the People’s Bank of China, the central bank.

If this transpires, it would give China’s law enforcement authorities a much-enhanced ability to trace and crack down on bad actors. It could also facilitate a highly responsive type of monetary policy that takes its cue from real-time information on transactions throughout the economy.

But this capacity for instant surveillance could also translate into a significant drawback. Claims by some Chinese analysts that the digital yuan can help break the hegemony of the dollar in international payments appear overblown.

While it may well be possible for China to conduct some future transactions with trading partners in digital yuan, concerns over data privacy appear likely to inhibit a wider acceptance.

The U.S. and some other Western powers have already shown their reluctance to allow Huawei, the Chinese telecoms company, to install 5G systems because of privacy concerns. Accepting a digital currency that furnishes China’s central bank with a window onto real-time transactions in their economies is likely to be similarly sensitive, analysts say.

In this sense, the deployment of the digital yuan may end up reinforcing divisions between China and the West. User privacy is a key consideration in efforts to design a digital dollar and euro, although the shape of future safeguards is unclear at this stage.

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