China and the race for the future of money - PwC
Everyone should be able to live, learn, work and participate in the digital world.
Pingyao, in Shanxi province, was once the financial centre of Imperial China—the birthplace of banks that led the world in remittances and settlements using “tickets” that were a sort of tokenised legal tender. The People’s Bank of China honoured Pingyao, now a UNESCO World Heritage Site, in 2019, with a set of silver and gold commemorative coins. Even as it honours the past, though, China is focused squarely on the financial future. In 2020, the country began testing a digital renminbi (RMB), which could have revolutionary implications for the future of money. Although a virtual RMB probably hasn’t blipped on many CEO radar screens, particularly given the disruptive effects of the pandemic, it’s time to start tracking how the financial environment could shift.
China started with several urban pilots of the digital RMB—known formally as digital currency electronic payments (DCEP)—and is studying moves to broaden the trial to additional areas. DCEP is a fully digital version of the RMB, downloaded using authorised apps (digital wallets). The currency may incorporate secure technologies such as blockchain, as well as near-field communication (NFC) capabilities that allow offline money transfers when two wallets (typically mobile devices) touch.
Although China is among the leaders, monetary authorities worldwide are piloting digital currencies.
Since 2009, when bitcoin arrived, a variety of cryptocurrencies has arisen, launched first by start-ups (like Ethereum), but more recently by established players such as Facebook, whose Diem partnership looks to create a new global digital ecosystem. The People’s Bank of China is likely to be a pioneer in the launch of a digital fiat currency, potentially ushering in a new era in the digital economy. (For more on China’s efforts, see The business implications of China’s digital RMB.)
For CEOs and their top teams worldwide, the rapid changes in the virtual currency landscape should prompt questions about their readiness to operate and seize opportunities in the new environment. For example:
Have we thought through the implications for supply chains when more transactions in some regions are denominated in digital currency?
What are the implications for our financing and currency operations as adoption grows and a new digital currency infrastructure develops?
How could we better serve our customers by reducing friction in digital currency transactions?
How up-to-speed are we on the new regulatory frameworks that monetary, securities and tax authorities are beginning to build out?
If you’re not wrestling with questions like these now, it’s time to start.
China’s boldness isn’t surprising given its position as a nearly cashless society, and its evolution as a digital society. In 2000, China had about 23 million internet users; today, that number has swelled to more than 900 million, substantially all of whom use the technology solely with a mobile phone. Impetus for that progress was the size and spread of its population along with the high costs of building a comparable “physical” communications infrastructure.
One consequence was the emergence of China’s hugely successful e-commerce and online-to-offline platforms. From these platforms, two pioneering digital payments systems coalesced—Alipay and Tenpay, with its WeChat Pay service—allowing nearly friction-free shopping and a proliferation of uses, including such everyday transactions as accessing public transportation.
There are a number of other potent, parallel trends that will continue driving the demand for digital payments and, by extension, digital currencies. Businesses worldwide continue to digitise, and the post-COVID world will result in even more commerce processed on social platforms. We see this in the KPI data reported by US and Chinese platform companies. Whereas previously the focus was on monthly active users, the attention now is increasingly on daily commercial transactions. This intensifying move to conduct commerce on the platforms is driving demand for digital payments, which has led to growth in the number of digital payment companies. The digitisation of commercial transactions and payments also creates opportunities for digital currencies, given their potential to speed up transactions; enable lower-cost, more streamlined monetary pathways; and log transaction information instantaneously.