In Part I and II of our e-CNY series, we discussed the key players driving this digital currency’s development and the direction of its core technology, respectively. (The Interconnected research team compiled all of the People’s Bank of China’s Digital Currency Research Institute’s patent filings into a publicly viewable Google Sheet.)
In this Part III post, we will look at the e-CNY’s strategic value and implications, both domestically and internationally. (See Part IV on the e-CNY product experience, if you want to jump ahead.)
Domestic: Open Ecosystem, Closed Backend
Domestically, e-CNY is looking to become the common, infrastructure backend of China’s entire digital financial system. This movement comes at a time when China’s tech industry is moving from a “walled garden” landscape to an open ecosystem that will nonetheless be based on a closed, CeFi (centralized finance) project that is the e-CNY.
This landscape shift is quite monumental and worth underscoring.
From the outside, China often looks like a monolith. From the inside, it's anything but that, especially its technology sector. Until very recently, China’s tech giants have built their empires on a “walled garden” approach, intentionally not playing well with each other. As a user, you cannot post a link from an Alibaba-owned platform (e.g. Taobao, Ele.me) on the Tencent-owned WeChat. UnionPay, the state-owned interbank network and payment card service, does not work interoperably with AliPay or WeChat Pay. Relative newcomers like ByteDance must create their own “walled gardens” to succeed, knowing that their links and content would not be welcomed on other platforms.
The walls are coming down and the ecosystem is opening up -- and opening up rapidly. After a series of antitrust policy changes and fines (so far on Alibaba, Tencent, Didi, and Meituan), the Ministry of Industry and Information Technology (MIIT) directed all the tech giants in mid-September to open up to each other. In a matter of a few weeks, WeChat Pay started appearing on Alibaba-owned services, both WeChat and AliPay are playing nice with UnionPay, and you can now share Taobao (Alibaba-owned) or Douyin (ByteDance-owned) links in your WeChat messages.
These seemingly trivial-looking changes were unthinkable five years ago. More importantly, the ministry driving all these changes, the MIIT, also has a seat at the table in the development of the e-CNY, as we noted in Part I.
As these tech platforms open up, what will likely happen is all transactions will eventually be tracked, processed, and controlled using e-CNY. That won’t happen overnight, as the e-CNY is still a young, untested project with technology, product, and reputational challenges. But that is the long-term direction.
There’s an interesting dichotomy evolving here of an ever-opening ecosystem being built on a closed and centralized digital backend. An open ecosystem tends to be better for consumers, merchants, and new startups, while also making top-down government control easier to execute (no big tech becomes too big to control). That’s why we are witnessing a flurry of Chinese government tech policy changes in the last few months. But an ecosystem that is too open also produces more illicit activities, financial crimes, scams, and capital flight -- a problem that China has been uniquely concerned about for many years. UnionPay did a poor job of preventing capital flight; e-CNY seeks to close those enforcement loopholes.
The interoperability among Chinese tech giants is happening at an accelerated pace and will likely be completed next year before the 20th Communist Party Congress in October 2022. How quickly the e-CNY will mature as the common backend is harder to predict. There are two important milestones of adoption to watch:
- Singles Day: How much transaction volume the e-CNY will facilitate during this year’s Singles Day, China’s annual online shopping holiday, will be an important short-term metric to watch. JD.com has committed to accepting e-CNY payments, but other e-commerce platforms have not, as far as I know. This lack of adoption may be intentional, because e-CNY is too brittle to handle Singles Day peak traffic. This year’s launch on November 1 already crashed Taobao for 20 minutes, and Alibaba’s cloud infrastructure team is one of the best-trained teams in the industry to handle traffic surges. It’ll be a while before the e-CNY’s infrastructure team reaches that caliber.
- Lunar New Year: the next Lunar New Year is on February 1, 2022, when red packet exchange will be at its height. e-CNY-based digital red packets are already being piloted in major cities like Shanghai. How successfully the PBOC can use this uniquely-Chinese product launch playbook will be the next milestone in e-CNY’s domestic adoption journey. WeChat Pay pioneered this “red packet to payment gateway” playbook to perfection during the 2014 Lunar New Year; will e-CNY be able to replicate that success with PBOC’s backing?
International: Global Inter-Bank Settlement Layer
Three days after Lunar New Year is when we will get to observe the first sign of e-CNY’s international ambition: the 2022 Winter Olympics taking place from February 4 - 20. This global event is a natural, if not "sneaky", vector for the e-CNY to internationalize the RMB and chip away at the US Dollar’s dominance.
e-CNY’s Winter Olympics rollout has been frequently, though superficially, reported. What’s missing in the narrative is which countries will most likely take China up on this offer and why. Given that most countries strong in winter sports are wealthy Western or East Asian nations, many of whom are skeptical of China’s intentions, e-CNY adoption from their athletes will be low.
However, countries with high crypto adoption rates are mostly emerging economies. According to the 2021 Geography of Cryptocurrency Report compiled by Chainalysis, among the top 10 countries in the crypto adoption index (see below), 8 are lower-middle-income countries or below. The US is #8 and China is #13. (Note: this report was compiled before China’s blanket prohibition on Bitcoin and other cryptocurrencies in September.)
Given that cryptocurrency traction tends to be deeper in poorer countries with weak, untrustworthy financial institutions, the athletes who would download the e-CNY wallet and take it back home would come from countries that won’t garner much attention at this, or any, Winter Olympics. In other words, it won’t be your high-flying Canadian hockey team, but your misfit Jamaican bobsled team.
It is important to not conflate e-CNY, a project that uses limited blockchain features, with cryptocurrency projects, like Bitcoin, Ethereum, and many (many) others, where the blockchain is at the core of their functionalities and value propositions. Based on the PBOC press conference on its e-CNY development progress held in July, the Digital Currency Research Institute is cherry-picking blockchain concepts like consensus mechanism, programmability, smart contract, and data separation (to reduce security risks).
Thus, a high crypto adoption rate does not guarantee acceptance of another country’s Central Bank Digital Currency (CBDC) like the e-CNY, but it does make the marketing conversation easier.
Regardless of how “blockchain” is the e-CNY, the PBOC is no doubt positioning the project as yet another attempt to “internationalize” China’s currency. This is a long-held ambition with many false starts, most recently in 2015 when the PBOC launched the Cross-Border Inter-Bank Payments System to mute response. Not so coincidentally, soon after that failed launch, the Digital Currency Research Institute was established.
Fully achieving this lofty goal will take more than one Olympics to build the global network effect and trust necessary. The Beijing Winter Olympics is just the end of the beginning of e-CNY’s own Long March beyond its border.
No Prior Art
The e-CNY’s strategic value and implications, both domestically and internationally, are ambitious and will take many years to realize. So far, the Chinese government has proven its ability to both plan and execute on a multi-decade time horizon. But this e-CNY project is materially different from China's past achievements -- there is no prior art from the West to illustrate what success looks like.
China’s economic growth from the last four decades was largely predicated on the assumption that there is always some valuable information to transfer or successful Western models to emulate. These often-forced transfers have come in the form of technology, intellectual property, managerial and operational best practices, and raw overseas talent.
This assumption falls apart when it comes to the e-CNY. The US is still figuring out what a stablecoin is and which government agency should regulate it. Countries with somewhat mature CBDC projects of their own, like Cambodia and the Bahamas, are hardly economic success stories worth modeling. The e-CNY is breaking new ground, and its success or failure rests on whether China can attract or develop creative, elite-level technical talent to build it.
In this regard, China has already shot itself in the foot by becoming a hostile environment for technical talent with its blanket crypto ban. Although you can argue that because there’s no prior art from the West, foreign talent is no longer worth attracting. But ask anyone who’s working in or investing in Silicon Valley right now, and 8 out of 10 people will tell you the brightest, most ambitious technical talents are working on (or trying to work on) crypto projects. None of them will want to build anything in China, while the e-CNY will have to rely on domestic talent to fill its org chart.
As we noted in Part I of this series, the crypto tech talent gap in China is huge and only being filled by opportunistic programs by second and third-tier universities. No offense to my friends in Sichuan, but a four-year blockchain bachelor’s degree from the Chengdu University of Information Technology is not going to cut it.
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在国内环境中，e-CNY正在寻求成为中国整个数字金融系统的通用基础设施后端。这一走向正发生在中国科技行业从 "围墙花园" 的格局转向开放生态的大环境下，虽然e-CNY本身是一个封闭的集中式数字金融项目。
在外界看来，中国往往像是一个统一的单体。从内部来看，它却不是这样的，特别是科技行业。直到最近，中国的科技巨头们一直在 "围墙花园" 的基础上建立自己的帝国，彼此之间并不融洽。作为一个用户，你不能在微信上发淘宝网或饿了么的链接；支付宝和微信支付一直和银联格格不入，互相使用的体验很差；像字节跳动这种相对的“新星”必须创建自己的 "围墙花园" 才能成功，它知道自己的链接和内容不会受到其他平台的欢迎。
无论e-CNY使用 "区块链" 有多深，央行无疑将该项目定位为人民币 "国际化" 的又一次尝试。这是一个长期的大目标，过去有许多次尝试和失败，最近一次是在2015年，央行推出的“跨境银行间支付清算系统”（CIPS），当时市场回应很一般。并非巧合的是，在那次失败之后不久，数字货币研究所就成立了。
正如在本系列第一篇中提到的，中国的加密币技术人才缺口很大，而且目前只由二、三线大学的一些 “投机” 学位来培养、填补。无意冒犯我在四川的朋友们，但是就指望成都信息科技大学的区块链本科学位，给加密币技术输送人才，是远远不够的。