With the entry of Didi, Bilibili and Meituan Dianping, China's central bank digital currency (DC/EP) is developing rapidly

This article was translated from: Cointelegraph

As the digital yuan project develops, the number of large companies in China testing the digital yuan is growing rapidly.

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Amid the global economic crisis and the coronavirus pandemic, the development of China’s national cryptocurrency “Digital Currency Electronic Payment” (DCEP) is progressing steadily. The fact that more and more major companies are joining the digital yuan project as partners in testing and implementing the technology is a clear proof of the progress made in the project’s development.

Meituan Dianping, China’s largest product wholesale and delivery platform, has become the latest company to assist the People’s Bank of China in testing and implementing the digital yuan project. Meituan currently has nearly 450 million customers and about 6 million companies using it to sell products.

Earlier, Didi Chuxing, the “Uber of China” with about 550 million customers, and Bilibili, a streaming platform with 170 million users, also joined the testing of China’s digital yuan. In addition, Li Xiangmin, founding partner of Chain Capital, revealed to Cointelegraph that Didi will become the world’s first private enterprise to accept central bank digital currency payments.

What does it mean for these companies to participate in assisting in testing the digital RMB?

In April this year, the People’s Bank of China began selecting the first batch of merchants to test DCEP. As Cointelegraph reported, the list mainly includes retail companies, especially food and beverage companies such as Starbucks and McDonald’s.

Entities such as Didi, Bilibili, and Meituan Dianping were chosen because their users transact billions of dollars every day. Such transaction volume can greatly accelerate the popularity of the digital RMB, thereby accelerating its adoption.

According to statistics provided by the two companies, the total number of customers served by these three companies adds up to more than 1 billion, not only in China, but also in Australia and some countries in South America. If this global approach is realized, DC/EP can obtain a large number of users in a testing manner, including representatives of large companies in the financial world. Therefore, DCEP has a very good chance of promotion within a reasonable time.

In addition, the above-mentioned companies will be the first to introduce this new technology into their products, thereby gaining a significant competitive advantage. As an infrastructure with a huge daily transaction volume, these companies will facilitate remittances in a more reliable, cheaper and faster way. Experiments have shown that while it usually takes about 45 days to complete a full letter of credit cycle with the participation of buyer and seller banks in different countries, the use of blockchain can shorten the entire process to one or two days.

Testing in progress

It is unclear how long the testing period for the digital yuan will last. However, given the rapid increase in the number of major Chinese companies involved in the technology, it is safe to assume that the first phase of testing is underway.

According to available information, DCEP testing has been carried out in four cities: Shenzhen, Suzhou, Chengdu and Xiong'an. The purpose is to test theoretical reliability, system stability, functional availability, process convenience, program applicability and risk management. According to Yu Jianing, president of Huobi University , this is also the first time that the regulatory authorities have confirmed the dynamics of this transitional digital currency pilot project.

Previously, four state-owned banks and several large companies including Huawei and telecom giants China Telecom, China Mobile and China Unicom have entered the testing phase. In April this year, the Agricultural Bank of China also confirmed its participation in the pilot project. However, Yu Jianing pointed out in a conversation with Cointelegraph that it may take a long time to complete the test:

“We should see that these current tests are actually still in the research stage, rather than being ready for immediate launch. In addition, according to the latest reports, Didi, Meituan, Bilibili and some other Internet companies have cooperated with some companies and banks to test DCEP. Meituan and Didi will explore the application of digital currency on smart transportation platforms. Bilibili’s cooperation has begun to enter the technical development stage.”

Aren’t WeChat and Alipay on the list?

So far, more than 20 companies have participated in the digital RMB project. However, it is worth noting that according to public information, Alipay and WeChat Pay are not on the list of participants.

The South China Morning Post recently stated that China will launch a digital yuan to replace Alipay and WeChat Pay. Given that these peer-to-peer payment systems control about 90% of China’s digital payment market, more than even Mastercard and Visa combined, it will be interesting to see if they will play a role in the launch of the CBDC system. The question most analysts ask is whether WeChat and Alipay will become the main providers of digital yuan services or if they intend to compete with the CBDC.

Chu Kang, founding partner of Benrui Capital , said that Beijing does not intend to replace Alipay and WeChat Pay with DCEP. Instead, the two companies are likely to be integrated into DCEP, as he told Cointelegraph:

“The popularity of peer-to-peer payments is now gradually increasing, and its usage scenarios have changed from simple transaction payment scenarios to areas such as life travel, entertainment, medical health and insurance. This peer-to-peer electronic payment software has become an indispensable tool in China's payment scenarios. We have reason to believe that the relationship between CBDC and WeChat and Alipay will be more of cooperation than competition.”

Although 90% of contactless payments in China are made through digital platforms, a national cryptocurrency could also provide the financial market foundation that modern electronic payments lack. In a conversation with Cointelegraph, Yu Jianing talked about the problems that DCEP could solve:

“First, the cost of cash circulation is too high and it is untraceable, posing the risk of money laundering. Second, electronic payments in existing bank accounts are based on tight coupling, which often leads to the leakage of personal privacy information and cannot meet the public’s demand for anonymous payments.”

Yu Jianing pointed out that Chinese payment platforms such as WeChat Pay and Alipay only cover some transaction scenarios, such as customer-to-customer transfers and customer-to-corporate small payments. However, the currently available mobile payment systems cannot help with business-to-customer wage payments and business-to-business transaction settlements. Users with other needs may have to choose between WeChat and Alipay or CBDC. Yu Jianing believes that DCEP and third-party payment platforms may coexist in the short term. However, in the long run, they will gradually merge into one system.

Given that China is seeking to fully digitize its financial sector, Alipay and WeChat Pay may become more popular payment systems after DCEP begins to replace cash payments. Over time, these two platforms will also become important tools for the government to accelerate China's transition to a cashless economy. In another scenario, Alipay and WeChat Pay may act as providers of digital RMB services. Li Xiangmin told Cointelegraph:

“Although neither Alibaba nor Tencent is involved in the research and development of DCEP, DCEP will have an impact on WeChat and Alipay. In the future, Alipay and WeChat Pay will play the role of channel or scenario providers, that is, booking air tickets, hotels, shopping and other platform functions.”

Considering that both Alibaba, the creator of Alipay, and Tencent, the creator of WeChat, have previously worked with provincial governments as well as the national government on blockchain-related initiatives, it is unlikely that they will ignore the adoption of DCEP. Musheer Ahmed, managing director of FinStep Asia, a consulting firm that helps financial technology startups , believes that these two platforms will become the main platforms for local adoption of the digital yuan given the scale of its use in China, telling Cointelegraph:

“These two tech-fintech platforms are important parts of the payment ecosystem. I expect they will also be a major part of local digital RMB usage. As the digital RMB also plays a role in further promoting cross-border use of the currency, these two companies, especially Alibaba, will become the main drivers of e-commerce in the Belt and Road countries/Digital Silk Road.”

Collaboration may be questioned

Looking ahead, it may be too early to see how collaboration between the government and big companies will develop, given the youth of blockchain technology and its regulation. It is also unclear whether the blockchain used in part by the DCEP will be able to compete with electronic systems that process billions of transactions every day.

Olinga Taeed, a council member and expert advisor to the China E-Commerce Blockchain Committee, told Cointelegraph that a number of ideas have been raised as to why the overall cooperation of WeChat, Alipay, and DCEP has been questioned, despite WeChat owner Tencent offering the Meituan Dianping platform to pilot the CBDC:

“While Alipay and WeChat Pay are moving toward a ‘blockchain-style’ transaction protocol, they currently believe that blockchain is not suitable for the volume of transactions they must handle. For example, Bitcoin currently has a transaction speed of about 3 transactions per second, but Alipay’s transaction speed is about 300,000 transactions per second, and it is scalable to more than 1 million transactions per second by the end of the year.”

Taeed also added that blockchain protocols and architecture are not suitable, but fifth-generation payment systems such as AeMoney, founded by former Alipay chief architect Hu Yan, are moving towards achieving peer-to-peer systems, but he does not think blockchain is a viable solution.