Name: Eastworld Spotlight: The inevitable rise of the digital yuan
Uploaded: 2020-07-30
Duration: 10 min 57 s
Description: FinTech Association of Hong Kong’s Lucy Gazmararian discusses China’s central bank digital currency.

[SOUND EFFECT] CLAY CHANDLER: Lucy Gazmararian is the co-chair of the blockchain committee of the Fintech Association of Hong Kong. And we're delighted to have her with us here today to talk about China's digital currency. Let's start by just talking about some of these acronyms that have been thrown around to describe whatever this thing is. I hear both Central Bank Digital Currency, CBDC, but also I hear this Digital Currency and Electronic Payment. What is the acronym of choice for this particular thing? And then tell us what it is. LUCY GAZMARARIAN: The DCEP is China's version of the CBDC, which is a central bank digital currency. So they have chosen to call their version of the CBDC a Digital Currency Electronic Payment. Actually, when it comes to central bank digital currencies, there is no set definition around the world. So many central banks are researching central bank digital currencies. In fact, the Bank for International Settlements says 80% of central banks around the world are researching this. So this is China's version of a central bank digital currency. CLAY CHANDLER: Tell us a little bit about what it is and what it would do, how it would work for an ordinary consumer or a company. LUCY GAZMARARIAN: It's essentially a digital currency. So the central bank, rather than minting physical cash and coins, they're going to "mint" a digital currency. And so really what we're talking about is an upgrade to cash, physical cash. And that is the use case, the first use case that China is going to have for their digital currency. It's going to be a retail central bank digital currency. So it's targeted at the retail sector primarily in China. And it's cash is getting an upgrade. CLAY CHANDLER: So would it be primarily targeted at consumers, or would it be more useful for more firms, or would be the main user? LUCY GAZMARARIAN: So when we say retail, retail actually encompasses individuals, it encompasses SMEs and corporates in China. So it's quite a wide-ranging category, actually. And the idea is that it's going to replace physical cash in China. Because the central bank is the one minting these digital tokens, this digital currency, it's legal tender. So it differs from other digital currencies people may be familiar with, such as Bitcoin or Libra Coin, other digital currencies. But this will be government-backed, legal tender in digital form. CLAY CHANDLER: China already has a quite advanced mobile and digital payment system, using Alipay or using WeChat Pay. How would this dovetail with those platforms? LUCY GAZMARARIAN: So importantly, the way that this new digital currency is going to get into the hands of the retail sector is via the existing financial services ecosystem. That is made up of the four state-owned banks, but it's also made up of non-banks, and that is Alibaba's Alipay and Tencent's WeChat Pay. So they are part of the distribution model. What the People's Bank of China, the PBoC, is not going to do, it's not going to hand over, or transfer, the digital tokens directly to retail. They're going to go via the banks and non-bank intermediaries, and then you download the digital wallet with these intermediaries, and that's the way you're going to be able to access new digital currency. So they're very integral to this new distribution model. CLAY CHANDLER: Why is that, I mean this is an extraordinary undertaking takes a lot of effort and manpower, obviously, to roll out. Why is it that the government sees that there's value in doing this? I mean, you mentioned efficiency, but are there other benefits that the government obtains from this? LUCY GAZMARARIAN: I mean, it's become as, China itself has said, it's a technological inevitability. It's not about whether they should embark on this undertaking, it's an absolute necessity. And it makes sense, because we look at our lives, increasingly we live our lives online. We have tech-enabled lives. And we're moving at breakneck speed towards a digital economy. And a digital economy, which includes tokenization, which is really leading in that new digital economy, needs digital money. It needs fiat money in a digital format. So otherwise, you're having the threat of Bitcoin or Libra Coin or other coins that have the technology that can integrate into the new digital economy. So it's an absolute necessity that China, as well as every other central bank, upgrades their currency. CLAY CHANDLER: Hmm, amazing. So all this data that will be available to central bank authorities, how will it be used, and then how will the central bank reassure people about the privacy of their data? LUCY GAZMARARIAN: So that's the really big question that's out there, and that's the big question that central banks really need to get their heads together and figure out how they are going to design this money. The data you are going to collect, there are two sides to it. On one side, the data that they're going to collect, given they are going to be able to gauge complete economic activity of a country in real time, and that data will be recorded on the blockchain-type network, distributed ledger, we don't know exactly. So the government will have access to all of that. On the one hand, it will just enable a central bank to be able to do their job more effectively. Because rather than having a lag in economic data, they're monitoring all the spending, the transactions, money supply, inflation implications, all in real time. With the ability to track all of that data that falls naturally into the lap of a central bank is all the other data. So every person's spending history, every person's bank account balance, tracking where they go in the world, because DCEP won't be available to Chinese as they do business in other countries and they visit other countries. So it's almost a sort of a way to track an individual as well. So there are big, alarming questions that need to be properly considered when it comes to privacy and anonymity. And the technology is there to enforce anonymity. So you can do, you can transact anonymously, there is the technology there. But it's a question of are they going to implement that? Is that something that they're going to build into their currency? And time will only tell, as different central banks come up with their versions of digital currency, as I say, there is no one size fits all. They're all going to be different, and likely to reflect the values and culture of their citizens. So we'll see if the different governments have a different approach to these critical questions. Which is the currency we're all going to end up using the most, what are we going to move towards? Or are all governments, we're just going to accept that all governments get to have this data, like we've kind of accepted with tech giants like Facebook? No one's really done anything about it. CLAY CHANDLER: That's fascinating, I mean, China's digital giants, particularly Tencent and Alibaba, are big players in other markets. India, of course, also Southeast Asia, whether as owners of tech companies in those markets, or whether as venture investors in some of the local players. Would it be easy for them to roll this out in local companies in Southeast Asia and India as well? LUCY GAZMARARIAN: I mean, absolutely, as much as it makes sense, there's someone else that needs to agree to that on the other side of the trade. So yes, they can, and it depends. At the moment, RMB is a tightly-controlled currency. So there's also that element. But if they do want to have currency flowing more freely outside of their own borders, they will have the technological capability to do that. And the other use cases brought up many times is the whole Belt and Road Initiative. There's so much trade happening in the Belt and Road, 60 plus cities, and there is not a universal currency. The US dollar is still the currency that needs to be transited, most huge transactions need to flow through the US dollar. So there is a case for the DCEP to become a universal payment instrument in emerging countries as part of the Belt and Road. And then there is talk that it could rise up as the world's reserve currency for emerging countries. CLAY CHANDLER: One complaint from China, that the US takes advantage of the fact that the dollar reigns supreme to try to enforce sanctions and other types of punishments on countries that go beyond just financial transactions and creating a market. Does this give China a way of buffering itself from those types of reprisals? LUCY GAZMARARIAN: Potentially. I think that we are so early in this journey. At the end of the day, user adoption of any currency is going to take time. We need all these currencies to be developed and launched. It's very difficult to say that a digital currency from China is going to be the new world's reserve currency, because the others have not launched yet. And let's take a look at how they are designed, what utility people see in them. I don't think the race is on. I don't think that if you move first, you get all the network effects. So really, we'll have to wait and see on that front. But we know that the central banks are also going to launch their own currency. And the US dollar has dominated global trade since the end of World War II. It is so integral to our world economy. I don't see that changing any time soon. And even if it is a case of a mismatch in technology innovation, i.e. China is streaming ahead and the US is lagging, the US now has a digital dollar project. They are very aware of what is necessary. They know in a digital economy, you need a digital currency. So it's a matter of time. CLAY CHANDLER: Well, this is fascinating. And it will be really interesting to see how rapidly this can be rolled out and will be accepted by consumers in the different markets. And it's extraordinary that China has been really at the vanguard of this, and thinking about it for so long, and now really coming into fruition. Lucy, thank you very much for sharing your thoughts and insights on what this new trend will look like, and we hope to welcome you again. LUCY GAZMARARIAN: Great thank you so much, Clay. 

Eastworld Spotlight: The inevitable rise of the digital yuan

International

This expert breaks down China's need for a digital currency.

The inevitable rise of the digital yuan

FinTech Association of Hong Kong’s Lucy Gazmararian discusses China’s central bank digital currency.