e-CNY: The Product

The Olympics have always been an opportunity for the host countries to showcase their athletic, economic, political, and, increasingly, technological power. The Beijing Winter Olympics is perhaps the best example of this tech-dominated narrative yet.

So far, the robot baristas, bartenders, and cleaners, as well as the remote-controlled bed with a zero-gravity mode, have generated way more media coverage than the opening ceremony or any actual sporting event.

Cool gadgets aside, the one piece of technology being piloted during this Winter Olympics that has the most far-reaching consequence is China’s Central Bank Digital Currency (CBDC), e-CNY. While we have written extensively about many facets of the e-CNY before, one missing dimension is the product itself (see our previous deep-dives on its Technology, Strategic Value and Implications, and the Key Players developing the project).

With the e-CNY’s pilot version now available on both iOS and Android in select cities and districts, we finally have a glimpse into how the product works. And it's more complex than a simple crypto wallet or a traditional bank app.

“Hard” Wallet and a Four-Tier “Soft” Wallet

The e-CNY’s product can be separated into a “hard” version and a “soft” version. The hard version has a physical element to the onboarding experience – ranging from a card with a specific amount similar to a prepaid Visa card, to a smartwatch, ski glove or badge. Most of these “hard” versions are limited to the Olympics “bubbles”, designed to show off this digital currency in the most Olympic-themed way possible.

The “soft” version, aka a software app you can download onto your phone, is more complex and intriguing. It has four different tiers, separated by different levels of registration requirements and transaction limits. Here is the breakdown:

Tier-1:

• Requirements: cell phone number, valid ID, personal bank account
• Verification process: in-person verification and signature with an authorized operating institution
• No limit on account or transaction limit

Tier-2:

• Requirements: cell phone number, valid ID, personal bank account
• Verification process: in-app
• Account limit: 500,000 RMB (~78,000 USD)
• Single transaction limit: 50,000 RMB (~7,800 USD)

Tier-3:

• Requirements: cell phone number, valid ID (no bank account needed)
• Verification: in-app
• Account limit: 20,000 RMB (~3,000 USD)
• Single transaction limit: 5000 RMB (~780 USD)

Tier-4 (the “anonymous” tier):

• Requirements: cell phone number
• Verification: in-app
• Account limit: 10,000 RMB (~1500 USD)
• Single transaction limit: 2,000 RMB (~300 USD)

Users can onboard first with tier-4, then “upgrade” to a tier with higher limits later.

Why the “Anonymous” Tier?

The most curious tier is the “anonymous” tier, where the only registration requirement is a cell phone number. It has the least requirement by far, making it easy for a new user to try the e-CNY, but the single transaction limit is just enough to pay for a dinner for four at a decently nice restaurant in Shanghai. Labeling this tier “anonymous” is also not entirely accurate, because you need to provide a valid ID to get a cell number to begin with.

When Mu Changcun, the director of the Digital Currency Research Institute, was asked about this issue, his response was that user data sharing between telcos like China Mobile and the People’s Bank of China (PBOC) is restricted by data privacy laws, so these “tier-4” accounts are effectively anonymous from the PBOC’s view. That is until there’s a reason to investigate an account for suspected financial crimes. In Mu’s mind, complete anonymity was never part of China’s, or any country’s, consideration when building its own CBDC.

So why have this “quasi-anonymous” tier in the product at all? Two possibilities.

Foreigner adoption: an important long-term strategic purpose of e-CNY is to “internationalize” the RMB. Piloting e-CNY in front of a limited foreign audience at this Winter Olympics is a small, but crucial step towards that goal.

Even during normal times (not Olympics during COVID), almost no foreign visitor to China would bother opening a local bank account just to travel. Getting a cell phone number, however, is quite common and necessary to communicate, move around, and even get wifi at a Beijing Starbucks. Having this Tier-4 version of the e-CNY wallet lowers the barrier to adoption for foreign visitors, so the e-CNY can begin to bootstrap some initial network effects and get product feedback from users beyond China's border.

Root out “pure anonymity”: there are only two ways of using money that is purely anonymous: cryptocurrency on a decentralized platform and stacks of dirty paper cash. China has outlawed the former. The e-CNY appears to seek to eventually remove the latter.

While one of the stated goals of this “quasi-anonymous” tier-4 layer is to enable convenient use of e-CNY similar to having paper cash, a digital currency is much easier to track when implemented without anonymity as a feature. As we discussed in a previous e-CNY analysis, one of the key institutional players is the PBOC’s Currency Gold and Silver Bureau (Security Bureau). This bureau’s main responsibility is minting money and managing money flow. Ever since the rise of AliPay, WeChat Pay, crypto-trading, and a variety of other fintech services, the bureau has been having trouble simply keeping track of the money it has minted.

The ubiquity of mobile digital payment (more than 80%) is the pride and shining jewel of China’s tech industry, but it is also one of its regulators’ biggest headaches. e-CNY’s growing adoption, especially this “quasi-anonymous tier-4”, can finally start the process of corralling the country’s money back to where it was minted – one digital RMB at a time.

The PBOC issues all the digital RMBs that are circulated via the e-CNY, just like how it mints paper money. I can see a day in the next 10 years when the PBOC will stop printing paper money altogether and only mint e-CNY’s. That will be the day when China's economy reaches “pure digitization”. That will also be the day when “pure anonymity” comes to an end.