How China is Leading the Way with Digital Currency Electronic Payment

In the second post of our series on Central Bank Digital Currency (CBDC), Art Stewart, Global Head of Sales & Marketing, IDEX Biometrics, explains how China became the leader in digital currency electronic payment.

Shopping with a smartphone e-wallet has been commonplace in Chinese cities for some time. One reason is that China lags behind in the widespread adoption of credit and bank cards. On the other hand, they have a thriving electronic industry supporting mobile phone design and creating large quantities of smartphones made for China.

One sector that has gone through a rise and fall are the block chain platforms such as Bitcoin. Chinese entrepreneurs initially took to Bitcoin in a big way: 65% of Bitcoin mining takes place in China (just 7.2% in the USA). The reason was cheap energy thanks to an abundance of coal-burning power stations and government subsidies. However, more recently, to the surprise of western speculators, China has moved to curtail Bitcoin – viewing it as an unauthorized and unregulated currency that cannot be controlled in the public and national interest.

Instead, they are taking the bold step of issuing a digital form of the Renminbi currency: the “digital yuan” has already been issued in four Chinese cities.

How does digital currency benefit China?

The e-yuan is a CBDC – a central bank digital currency. It will use a block-chain based technology to uniquely identify each currency unit, but every transaction is logged in a central database, making this form of money more traceable than any other. Local exchanges will operate ledgers, but they are not banks. Nor is the currency “mined” but, instead, it is pegged to the actual Yuan and issued by government fiat. There are major benefits both for the Chinese state and the public.

Bitcoin mining profits a minority, whilst the government can direct CBDC currency to whichever sector of its population it deems deserving.

Traceability will provide unprecedented insights into how money moves around within national and regional economies. It could enable the government to micro-target parts of the economy, apply interest rates and control the money supply. They can also internationalize its use, extending the influence of China’s currency to the rest of the world.

Use of the e-yuan enables the Chinese government to open the mainstream economy to previously unbanked elements of the population. Of the major economies, China has the highest percentage of population without access to banking facilities. Its CBDC strategy is set to remedy this to a significant extent.

This will enable economic participation from hitherto marginalized elements of society without the need for expensive infrastructure.

Moreover, the same elements of society will not require extensive digital access in order to use the e-yuan.

A biometric payment card puts the digital yuan in everyone’s pocket

For the average person, the new currency means lower bank or transaction charges and greater security from thieves and hackers. Stealing a traceable currency is less appealing than the anonymity of stealing a wallet but still possible – without a biometric payment card. That is one reason why the Postal Savings Bank of China is trialing cards equipped with fingerprint scanners developed by fintech partners IDEX Biometrics and Goldpac for transactions in the new currency.

A biometric payment card is also smaller and cheaper than a smartphone and requires no battery. That means everyone can have one and be less dependent on network connectivity and power sockets. One trial combines digital payments into a medical ID card.

Although China is primarily motivated by its own national concerns, the digital yuan sets a precedent that other governments cannot ignore. Digital currencies and biometric payment card technology are the future of money.

The previous post in our series on Central Bank Digital Currency (CBDC) discussed how central bank digital currency works.