The digital currency era is accelerating, injecting new imagination into the payment market

Are you ready, financial companies?

The digital currency era is accelerating, injecting new imagination into the payment market

At the Boao Forum in Asia on April 18, Li Bo, deputy governor of the central bank, revealed that the next step will be to continue to expand the scope of the pilot digital yuan, in more scenarios and more cities. The “digital currency era” may be the first to descend in China.

Fan Xiaojuan

Zhonglun Law Firm

Not long ago, Chengdu, one of the most recent pilot cities for the Digital RMB (DCEP), issued 200,000 DCEP red packets to the public, totaling RMB 40 million, making it the fourth large city in China to conduct such a pilot. According to the Ministry of Commerce, DCEP will also be opened for piloting in 28 provinces and cities, including Nanjing, Hangzhou and Hainan, including major venues for the 2022 Winter Olympics in Beijing.

The free red envelope of 200 yuan per capita gave many Chinese people their first taste of digital currency, but the concept of digital currency is actually not new: as early as 2014, China launched the research and development of DCEP. Talking about the rapid promotion of DCEP, Fan Xiaojuan, a partner at Zhonglun Law Firm, pointed out the special background that in the past two years, “the process of landing digital RMB has accelerated due to the epidemic, changes in the international situation and the need for internationalization of RMB”.

China is not alone in this sudden acceleration: a recent survey by the Bank for International Settlements shows that 86% of the central banks in more than 60 countries surveyed had begun research on digital currencies by the end of last year, and at least 36 central banks had published progress on their digital currency work. Among them, 10% of national central banks have gone live with digital currency pilot projects.

Liu Yang, a senior lawyer at Deheng Law Firm, also noted the current situation that countries are accelerating their digital currency research, and pointed out that DCEP should therefore be put into application as soon as conditions are ripe, which is “not only in line with the actual demand, but also conducive to our always maintaining a leading position in digital currency in the world”, thus providing China with a leading position in the future world monetary system. This will give China a head start in the future competition for the world’s monetary system.

Regulatory Status

According to the Chinese central bank’s definition, DCEP is a digital form of legal tender issued by the People’s Bank of China, operated by a designated operator and redeemable to the public, equivalent to banknotes and coins, with value characteristics and legal tender. Therefore, Mr. Liu Yang told ALB that the current Chinese law on cash is still applicable to DCEP.

Although the essence of DCEP is “cash in circulation”, in other words, it is not different from cash, “the current legal system in China is still in the legislative stage, and there is still no direct legal basis for it.” Attorney Fan added, “I believe that as the DCEP trial continues to advance and mature, the legal system will also be further clarified and regulated.”

In July 2020, the “Opinions on Providing Judicial Services and Protection for Accelerating the Improvement of the Socialist Market Economy System in the New Era” jointly issued by the Supreme People’s Court and the Development and Reform Commission made the first official mention of “digital currency”. The Opinions state that China will “strengthen the protection of new types of rights and interests such as digital currencies, online virtual property and data.” The release of the Opinions made it possible for digital currencies to be included in the scope of judicial protection for the first time.

Notably, in October of the same year, the People’s Bank of China released the “People’s Bank of China Law (Draft Revision for Comments)”. “Article 19 of the Draft adds a second paragraph to Article 17 of the current People’s Bank of China Law, which provides for RMB units, ‘RMB includes both physical and digital forms’.” Fan said, “This amendment, if it formally comes into effect, will clarify that digital RMB is a legal form of RMB, laying a legal basis for the issuance of digital RMB.” In addition, the draft reiterates that the production and sale of digital tokens in lieu of RMB is widely prohibited, except for DCEP.

Considering the legal risks that may be triggered by the rapid development of DCEP, lawyer Liu Yang cautioned, “The contradiction between the efficiency and convenience of DCEP and the leakage of personal information data, the strengthening of currency regulation and the protection of personal privacy, the electronic payment of digital currency and the dataization of RMB, and the security of privacy data and the flow of interoperability must be truly dealt with in order to realize DCEP’s ‘original intention’.”

Introducing competition

DCEP will adopt a two-tier operating system in the future, which means that the central bank will first exchange digital currencies to commercial banks, and then these commercial banks will exchange them to the public. According to lawyer Liu Yang, the system will not change the existing currency delivery system and binary account structure, which will not compete with commercial banks’ deposit currencies, so DCEP’s operating system determines its inseparable character from commercial banks.

In addition to the four state-owned commercial banks – Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China and China Construction Bank – which will provide DCEP-related services, the Ant-backed NetShares Bank and Tencent-backed WeZhong Bank will also join the DCEP pilot implementation. NetShares Bank said in a statement that it, as one of the DCEP R&D participating institutions, will steadily advance the pilot testing work in accordance with the overall arrangement of the Chinese central bank.

The participation of private banks in the DCEP pilot is on the same starting line as state-owned banks, which, in Fan’s view, demonstrates the regulator’s equal treatment of market players, will give private banks the opportunity to participate in the new RMB business and will help establish a fair and orderly competition system in the banking industry. At the same time, private banks will also play its “catfish effect” to stimulate innovation and improve the quality of service in the banking industry.

Lawyer Liu Yang added that the strength of private banks “with the support of Internet technology giants, but also in different areas and perspectives to strengthen the pilot and promotion of DCEP, no doubt more beneficial to the overall development of DCEP”.

Fan also agrees with this view, as “online merchant banks and micro banks have already formed a certain market scale, and have also cultivated the habit of cashless payment among a significant portion of users.” She believes that “the participation of private banks enables DCEP to adapt to diversified payment habits, thus contributing to the promotion of DCEP and the smooth and orderly transition of RMB from physical currency to digital currency.”

Breaking the exclusivity

Mobile payments are ubiquitous in China, but the most commonly used methods are almost always controlled by the two Internet giants. the steady progress of the DCEP pilot may mean that China is curbing the duopoly in the payments market, affecting the development of existing payment forms to some extent.

In Fan’s view, the launch of DCEP does have a knock-on effect on the payments market and fintech companies. In terms of legal regulation, “the payment market/fintech has indeed seen disorderly competition in recent years, and it is the basic duty of financial regulation to ensure financial safety and prevent financial risks.” She said, “China’s regulation of fintech will follow the principle of ‘resolutely breaking monopolies, correcting and investigating unfair competition, and maintaining a fair competitive market order’.”

Lawyer Liu Yang told ALB that there is also a very real problem for users: the cash property of DCEP determines that it cannot generate interest, while Alipay and WeChat can provide more financial solutions for users. In a sense, however, Mr. Liu believes that DCEP has special advantages over Alipay and WeChat because it “can transfer value without accounts, fees or internet access.

Mr. Fan also suggested that the launch of DCEP would “give more room for imagination” for the development of payment market and financial enterprises. “Before the launch of DCEP, due to the lack of legal digital currency, and bitcoin and other ‘virtual currencies’ are not legal tender, not allowed to circulate in the market as currency, some innovative business in the technical level lack of payment tools, compliance level lack of legal support.” She said, “After the launch of DCEP perhaps there will be many innovative businesses emerging to enliven the financial market and thus serve the real economy.”

Opportunities and challenges

Talking about the impact of DCEP on fintech companies, Mr. Liu Yang pointed out that the future competition will occur from “payment channel” to “payment carrier”: unlike Alipay, WeChat and other payment channels, the essence of DCEP is a carrier, which is equivalent to a “wallet”. It is the equivalent of a “wallet”.

“In the future, the main competition track for financial technology companies is the ‘wallet’ field, and whoever’s ‘wallet’ does well and users are willing to use it, will have more traffic. In this regard, the existing ecology of fintech-type companies can also be fully grafted into the DCEP field, and there will be more and more derivatives, and the audience of ‘wallet’ will be more and more extensive.” Liu said.

In addition, he also explained the centralized attributes of DCEP. He told ALB that the “controlled anonymity” adopted by DCEP will enable the transactions of virtual digital currencies to be traceable. Therefore, under the premise of dealing with user privacy and data security, the tracking of transactions may enable all-round supervision of currency data, thus “effectively curbing financial, tax-related and foreign exchange-related crimes, as well as being more conducive to combating the gray industry” .

Lawyer Fan, on the other hand, raised hidden concerns about the compliance of the cross-border business of fintech companies, as such companies “have a considerable portion of cross-border business, which requires them to not only comply with domestic laws and regulations, but also pay close attention to changes in international rules, or they may face serious penalties or even a ban on business operations.

Mr. Liu agrees, saying that the development of DCEP will force fintech companies to pay more attention to compliance, so that “some companies that really want to do something and can do something will gradually develop and grow along the path of compliance, while those pseudo-fintech companies that wander in the gray area are doomed to be eliminated”.

This article also appears in the April issue of Asian Law Journal China.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

Like (0)
Donate Buy me a coffee Buy me a coffee
Previous 2021-05-17 16:16
Next 2021-05-17 16:22

Related articles