China has been in the early stages of testing a digital yuan (dubbed e-CNY) over the course of the past two years, rolling out usage of the digital currency in a number of major Chinese cities. Adoption of the digital yuan recently saw a major catalyst in the People’s Bank of China (PBOC) allowing foreign athletes and spectators at the Beijing 2022 Winter Olympics to use e-CNY for the purchase of goods and services.
According to Eswar Prasad, economics professor at Cornell University and author of “The Future of Money,” e-CNY may still be experiencing some growing pains in terms of usage.
“So some numbers sound impressive — there are apparently about 260 million people who have downloaded the digital yuan app to their phones. But if you look at the volume of transactions being conducted using the digital yuan, it's still very modest,” Prasad told Yahoo Finance Live.
He joined Yahoo Finance Live to discuss China's state-backed digital yuan, the U.S. digital dollar debate, and what it would mean for the Federal Reserve to enter the realm of digital currencies. Prasad noted that only around $8 billion has been transacted over the last six months using the digital yuan compared to over $1.5 trillion through the Alipay platform just in 2020.
China is 'putting all its muscle behind it'
Alipay, whose parent company is Ant Group — an affiliate company of the Alibaba Group (BABA) — along with WeChat Pay, which is owned by Tencent (TCEHY), remain the two most popular payment platforms in China, according to Statista.
“So I think the issue here is whether there is a strong user case for the digital yuan given that you have Alipay and WeChat Pay providing very easily accessible, low cost, digital payments to practically everybody in China,” he said. “But the government is certainly determined to make sure that the digital yuan gets a lot of traction. And it's putting all its muscle behind it.”
Beijing vs. the private sector
Indeed, the PBOC intends to expand its cross-border payments system in the digital yuan as part of a five-year plan for financial standardization lasting through 2025. However, China’s central bank must compete with the popularity of Alipay and WeChat Pay which have already been building towards the country’s near-cashless society for years.
“These two payment giants have created a lot of economic and political power,” Prasad said. “They are making it harder for new entrants into the payment space, limiting competition, limiting, potentially, innovation.”
He ultimately believes that the PBOC has two concerns with competing payment platforms: the usage of the yuan disappearing at the retail level and the amount of data Alipay and WeChat Pay have been able to collect without the Chinese government having full access. Beijing has already taken steps to break up these tech giants, and Prasad sees the digital yuan as just another weapon in the government’s arsenal to limit the economic influence of China’s private sector.
Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter @thomashumTV
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