Jiaying Jiang is a Hauser Global Fellow (New York University School of Law), and Karman Lucero is a Fellow at the Paul Tsai China Center (Yale Law School).

A Central Bank Digital Currency (CBDC) is a digital liability issued and guaranteed by a sovereign central bank that operates in a digital infrastructure with potentially more affordances than previous kinds of currency, such as electronic accounts or paper cash. China’s CBDC, E-CNY, which was previously called Digital Currency/Electronic Payment (DC/EP), is a proposed digital legal tender issued by China’s Central Bank—the People’s Bank of China (PBOC).

What is the state of E-CNY trial?

China is a pioneer in exploring CBDC. The early-stage research started in 2014 and now China is testing E-CNY in a few cities, cooperating with various entities such as commercial banks, ride-hailing company Didi Chuxing, and food delivery giant Meituan Dianping. The most recent trial was in October 2020. The PBOC distributed 10 million E-CNY (US$ 1.4 million) in digital “red pockets” to 50,000 Shenzhen residents. Residents could spend it at over 3,300 restaurants and retail stores. The week-long trial ended with 8.8 million E-CNY (US$ 1.3 million) being spent in over 62,000 transactions. In 2022, E-CNY will be tested at the Beijing Winter Olympics.

What are key features of E-CNY?

• E-CNY is designed to replace cash in circulation. It is still only in trial phases.
• To ensure that E-CNY will not be overissued, commercial banks are required to maintain a 100% reserve ratio.
• The issuance and redemptions of E-CNY will follow a two-tier system with commercial banks and other authorized entities as the second-tier distributors.
• E-CNY is designed to allow for offline transactions and “controlled anonymity.”
• PBOC will have three data centers that perform registration, authentication, and big data analysis.

What are China’s motivations for issuing E-CNY?

Currently, it appears the creation of E-CNY is driven mainly by internal needs, such as reducing costs, preventing the illegal use of money, improving financial inclusion, transforming into a cashless economy, responding to the duopoly of the mobile payment market, and generally increasing government control over the economy and individuals within the PRC’s jurisdiction. Externally, China’s experimentation with E-CNY has been sped up by Diem due to the threat that Diem could potentially undermine the monetary sovereignty of the RMB. It is arguable that China has an agenda to use E-CNY to internationalize the RMB. It is unclear how feasible these domestic and international goals are.

What are the potential impacts of E-CNY?

The impact on the existing payment system depends significantly on how the PBOC deploys E- CNY. The PBOC seems to emphasize the roles of existing intermediaries, especially commercial banks. The two-tier system depends on commercial banks and other entities as intermediaries. Thus, the role of commercial banks and these entities remains significant.

An additional impact of E-CNY appears to be greater control of the interbank system. Because theoretically the PBOC can clear every transaction conducted via E-CNY, and because the “three centers” will be collecting other kinds of not-yet-specified information and intelligence, widespread adoption of E-CNY could allow for greater government insight and control at a micro level in real time—they could potentially monitor and control every transaction.

The adoption of E-CNY could potentially reduce the duopoly of Alipay and Wechat Pay in the mobile payment market. Through a combination of incentives (e.g., E-CNY is free for businesses) and legal force (e.g., the government can require government subsidies to be paid with E-CNY), E-CNY could limit the market share of the duopoly. Besides, since the PBOC could have the power to clear transactions and have expanded insights into transactions, Alipay and WeChat Pay could lose a great deal of de facto independence and maneuver room with more widespread adoption of E-CNY. At the very least, the PBOC would have more leverage over Alipay and WeChat Pay.

It is unclear how E-CNY will affect international settlements. CIPS and other SWIFT alternatives already exist without the need for digital currencies. It appears that many barriers to setting up international settlement systems are not technical ones but have more to do with legal, institutional, policy and other non-technical barriers.

What are the challenges facing the development and deployment of E-CNY?

Information access and usage raises key questions. It appears that the PBOC will have complete access to information concerning transactions using E-CNY because, theoretically, it has the capacity to clear all transactions. It seems clear that other agencies will need access to this information, including law enforcement, tax authorities, and others but it is unclear how they will get it. While there are already existing rules detailing the sharing of government information among government agencies, their specific applicability to E-CNY remains unclear.

In addition, intermediaries involved in the deployment of E-CNY must necessarily have access to at least some information involved in E-CNY transactions, but their rights and responsibilities regarding this information remain unclear. Increased government access to transaction information raises serious questions about privacy and free expression. In theory, this information could be used to spy on and coerce individual account holders for reasons other than criminal activity. It would be beneficial for the rights of users as well as the viability of E-CNY if the National People’s Congress (NPC) articulated clear rules regarding how the PBOC can share collected data with third parties, including other government agencies and intermediary companies.

Due process is another concern. Widespread deployment of E-CNY would potentially offer the PBOC, and the Chinese government by extension, unprecedented, real time control over the economic rights and capabilities of individuals. Currently, central banks and law enforcement often need to rely on the cooperation and compliance of intermediaries to investigate and enforce laws related to financial crime. Such institutional frictions increase the incentives for governments to act within legal bounds. In theory, the possibility of the PBOC needing to clear every transaction conducted with E-CNY would give it the power to unilaterally halt transactions and effectively freeze individuals or institutions out of the financial system. Absent additional mechanisms, individuals and businesses would just have to assume that the PBOC is doing so legally.

The amount of information collection that a digital currency enables raises serious questions about privacy, both in terms of private companies as well as from governments. Given the broad extent of information collection, how will the PBOC protect users’ privacy? The PBOC’s proposed ‘controllable anonymity’ is ambiguous and leaves many unanswered questions.

The full report is available at SSRN: https://papers.ssrn.com/abstract=3774479.

If you would like to contact the report’s authors, please email them at
Email JCJ6709 at NYU and
Email Karman Lucero at Yale respectively.
Authors are grateful to participants at the workshops of Information Law Institute at NYU Law School and
Paul Tsai China Center at Yale Law School for their generous comments and suggestions.