Alipay, WeChat, SWIFT, Crypto, DCEP, Control

I'm one of those weird people who likes to post about all kinds of things, from Cuba's dual currency system, greener biofuel, shrinkflation, to smart food control, digital labeling and CBDC, just to name a few topics. I'm interested in a lot of things and strongly believe if you understand why things are happening, could help you in the future.

One of the topics I'm interested in, besides crypto, is central bank digital currency (CBDC), how's going to roll it out first and how it's going to impact the country's economy.

Image by xresch from Pixabay

There are a couple of players on the field already, working on rolling out their own digital currency, one of them is China. The project is called Digital Currency Electronic Payment (DCEP) but it is often called as the digital yuan. The project started in 2014 and had three years of slow evolution, then started to speed up in 2017.

The Beginning

While America spent the past decade upgrading its bank-based magnetic striped cards with chips, China experienced a retail payment revolution. Leapfrogging the card-based system, two new payment systems have come to dominate person-to-person, retail, and many business transactions. China’s new system is built on digital wallets, QR codes (two-dimensional bar codes), and runs through their own big tech firms: Alipay running through Alibaba (China’s version of Amazon) and WeChat Pay running through Tencent (China’s version of Facebook).

China’s new payment system exploded in under a decade, growing from inception to dominance. With over a billion users on each platform, the power of network incentives has been unleashed. The new payment system has replaced cards and cash at registers, how families give gifts, and even how beggars ask for money, with QR codes replacing tin cups.
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Alipay & WeChat

Alipay was first with launching it's mobile wallet in 2004, and by the time WeChat was founded in 2013, Alipay overtook PayPal as the world's largest mobile payment platform in 2013. Having two mobile wallet giants in the country, one of which overtook the biggest mobile payment platform in less than 10 years is not something to be overlooked. If we add Bitcoin to the mix, that was born in 2009 and started to gain popularity year by year, Facebook announcing Libra in 2018, a cross border currency, I'd say China's government has been under a lot of pressure and I'll tell you why.

Slowly it became obvious that mobile payments took over and whoever ran those apps had control over financial transactions and a good part of the economy as well. Merchants stopped accepting other payment methods than the QR code based mobile method. With time they had diversified their portfolio, offering loans as well.

Registering to these apps requires a set of personal data for identification, so they know everything possible about their customers. Having access to user data throughout monitoring their transactions gave them another tool to build a complete profile, knowing what users buy, where they eat, where they spend their money and who they sent money to. When applying to a loan, these details helped them determine if the user worth being given the loan or not. Not to mention they decide who is eligible for an account and who doesn't.

This put a huge pressure on the Chinese government. They knew they are losing ground and the bigger these companies get, the bigger the threat. In countries where the government and the major (or only) political party is heavily controlling everything, no one is allowed to accumulate that much power as it becomes a threat.

SWIFT

Society for Worldwide Interbank Financial Telecommunication (SWIFT) is also seen as a threat, as it handles the majority of international bank transfers. It's a middleman that uses an old and slow system, not to mention the accusations that the NSA used the system to spy on people.

Crypto

Chinese citizens are not free to do whatever they want, that is obvious. There's a limit about how much money they can convert into foreign currency annually, and that's $50,000. Yet last year over $50 billion of cryptocurrency was moved from China-based digital wallets to other parts of the world.

DCEP

Let's recap what we know so far. Alipay and WeChat are already controlling a big part of the financial market. SWIFT could block China from the payment system, just as it did with Iran, due to the economic sanctions. Cryptocurrencies are considered a threat as there's no way the government can control it.

The only viable solution for the Chinese government is the digital currency. DCEP will have the same value as the existing Yuan. The mobile wallet is designed to work offline, without internet, so people in remote areas would be able to use it without any problem. The existing QR code system would be still in use, but the payment process would not be handled by the above mentioned giants, but by the banks.

Banks in China are state owned, there's no such thing as private banks, therefore all the banks are heavily regulated and report to the government.

Privacy Concerns

Once DCEP is rolled out and cash is no longer usable, everyone in China will be forced to use these mobile wallets. When I say everyone, I mean Chinese citizens, foreigners like diplomats, businessmen, students, NGO workers, everyone will be exposed to the government throughout their finances.

“DCEP would give the Chinese Communist Party something that no government has ever had in history: The ability to monitor in real time the minute financial dealings of its citizens,” said Yaya J. Fanusie, an Adjunct Senior Fellow at CNAS and co-author of the report, in an email to CoinDesk. His research focuses on the national security implications of cryptocurrencies.

He said that while much of the world transacts digitally today, that transactional data is not accessible wholesale by government authorities because the government has to go through financial institutions to acquire the data.

The DCEP design deviates from this model, putting the data directly in the hands of the CCP without having to go through intermediaries. Anyone using a digital yuan pretty much concedes his or her financial privacy directly to the Chinese government, according to Fanusie. It’s not yet clear how accessible DCEP would be outside China, but if it is, this has implications for other governments. source

China is in a hurry to DCEP because of the obvious pressure coming from both inside the country and outside as well. The government may see it as necessary and maybe the only solution in order to take control. People however may have a different opinion but as they have been raised to obey, don't have much choice here.

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